According to credit rating firm Morningstar DBRS, banks throughout the world will probably continue to lose money on office property loans as additional defaults result from a brutal collapse in valuations, which was announced on Wednesday.

Due to increased borrowing rates and a steep decline in office space demand as more individuals work from home, commercial landlords are now at greater danger of defaulting on their bank loans.

A number of lenders have increased their cash reserves to cover potential losses on office loans, especially to cover exposure in the US. These lenders include Wells Fargo, JPMorgan, and Deutsche Bank in the US, as well as Deutsche Bank in Germany.

The real estate exposure of banks is causing concern in the markets, as evidenced by the steep declines in the share prices of smaller lenders New York Community Bank and Deutsche Pfandbriefbank this month due to market worries.

Researchers at Morningstar DBRS stated that they anticipated more provisioning.

According to Nicola De Caro, Senior Vice President of Global Financial Institutions at Morningstar DBRS, “many banks will need to make some downward revisions to property valuations and, as a result, incur higher provisions and loan losses.”

“Given the renewed market pressure after the banking turmoil of last spring, we will continue to monitor closely any potential implications on depositor confidence and liquidity at banks.”

According to a note from Moringstar DBRS, declining sentiment will probably increase financing prices, even outside of the US, and tightening bank lending rules will make matters worse.

While most lenders were able to mitigate the effects of reduced office prices, the note also indicated that in the absence of a “true recovery” for the sector, banks may need to make additional modifications.

(Adapted from Reuters.com)

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