Wednesday, October 05, 2016

Deutsche Bank Was Fined $14 Billion. What Does That Mean For U.S. Commercial Real Estate?



Deutsche Bank shares continued falling Monday, after news broke late last week that the U.S. Department of Justice was fining Germany’s largest lender a whopping $14 billion to settle claims over its issuance of residential mortgage-backed securities in the lead-up to the 2008 financial crisis.
The shares dropped 2.6% in Frankfurt trading Monday and were 0.4% lower at 2:03 p.m., Bloomberg reported, bringing the loss for the year to 47%. The decline Monday came after shares fell 8.5% Friday on news of the Justice Department fine.
With Deutsche Bank being one of the biggest foreign originators of U.S. commercial real estate loans — both in securitization and balance-sheet lending — this news could affect the commercial real estate industry in multiple ways.  One major consideration is the effect on Deutsche Bank itself. Ultimately, Deutsche Bank could potentially pull back on U.S. CRE lending, or at least fail to increase it.
Even though Deutsche is negotiating the amount of the fine, saying it “has no intent to settle these potential civil claims anywhere near the number cited,” it only has about $6 billion in litigation reserves. Societe Generale analyst Andrew Lim has said the lender would still be “significantly undercapitalized” even if the bank could cover an eventual settlement with the U.S. government.
The $14 billion fine is nearly three times as much as the $5 billion Goldman Sachs recently agreed to pay, though not as much as the $16.65 billion record high agreed to by Bank of America in 2014 as a settlement for claims of financial fraud before and during the financial crisis.
But the Justice Department fine isn’t the only strike against Deutsche. Deutsche Bank Trust Corp., a U.S. arm of Deutsche Bank, failed the Federal Reserve’s stress test in June, with the Fed saying the lender has “broad and substantial weaknesses” in its capital planning.
The stress test announcement came just a few days after U.K. voters decided to leave the European Union, which left Deutsche Bank — as a lender with an extensive presence in London — heavily exposed to any economic fallout from Brexit. Also this summer, the International Monetary Fund said that among the world’s biggest banks — the global systemically important banks, or GSIBs — Deutsche appears to be “the most important net contributor to systemic risks.”
This isn’t to say all is lost for Deutsche (see here for an analysis of how the German lender could potentially stand to gain from Brexit), but Deutsche Bank is facing major challenges.
In addition to the issues related to Deutsche specifically, the bank, as a major CMBS lender, is also subject to the vicissitudes of the CMBS market. Commercial mortgage-backed loans have been decreasing, a change that comes ahead of upcoming legislation that would require deal sponsors to keep 5% of the deal on their books.
Deutsche was the top CMBS loan contributor in the public CMBS market last year and early this year, according to a CrediFi analysis of public conduit/fusion CMBS loans.
Yet the impact of the Justice Dept. fine could extend beyond Deutsche Bank and its lending.
The fine could also have a more extended impact on the stability — as well as the commercial real estate lending — of other European lenders that are still being investigated for similar offenses and could face penalties.
These include the Royal Bank of Scotland, Barclays, Credit Suisse and UBS, the Wall Street Journal reported.
What kind of commercial real estate lending does Deutsche Bank already do in the U.S.?
Deutsche was the top foreign lender in New York City between January 2015 and mid-2016, according to CrediFi data, financing such high-profile properties as the office tower at 3 Bryant Park, formerly known as 1095 Avenue of the Americas.
In January 2015, Deutsche subsidiary German American Capital Corporation financed the acquisition by Ivanhoe Cambridge and Callahan Capital Properties, which bought the 41-story tower from Blackstone for $2.2 billion, a deal described as the largest single transaction for a single U.S. office building since 2008.
In August the owners reportedly sold a 49% stake in 3 Bryant Park to Hong Kong investment firm Real Summit Investment for $1.15 billion. The deal came several months after cloud software company Salesforce announced it would be moving its headquarters to the building, becoming the anchor office tenant by the end of 2016. The company also said it would rename the building Salesforce Tower New York, replacing MetLife’s logo on the top of the building with its own.
Outside of New York City, Deutsche-financed properties include four industrial properties in Illinois, for which the German bank issued a $106 million loan in April. Two of them — 855 Bonnie Lane and 2355 Touhy Ave — are in Elk Grove Village, which is located near O’Hare International Airport and is one of the largest industrial parks in the U.S. Each of the two properties has a lot area just over 100,000 square feet.
In JLL’s 2015 Port, Airport & Global Infrastructure report, the commercial real estate firm ranked O’Hare as the top U.S. airport from the perspective of CRE players who invest, develop or occupy industrial properties in “airport-centric locations.” The report says O’Hare has an industrial real estate base of 100.9 million square feet, over 60% more than Newark airport.

Written by Ely Razin - Forbes