May 31, 2018 Italy Crisis: Could Europe’s Troubles Be a Boon for U.S. Banks?
Financial markets were roiled this week by Italian political turmoil that investors fear could lead to a European financial crisis, with Italy possibly requiring bailouts or even quitting the euro. This could spell trouble for European banks ‒ but by the same token, it could also potentially benefit U.S. banks competing for the same business.
Though banks based in Italy were hardest hit by the uncertainty, other European lenders, such as Deutsche Bank, could also be affected by the continent’s woes.
That would only add to existing problems for Deutsche Bank, including the possible layoff of 10,000 employees through 2019. Rating agencies such as Standard & Poor’s are already concerned about the German bank, and reportedly may lower their credit ratings based on the strategy announced following the appointment of new CEO Christian Sewing in April.
Sewing said Wednesday the bank is committed to its business in the U.S. even though it is cutting back. Deutsche Bank is closing its Houston office and moving away from its Wall Street location to a smaller Midtown office.
Given that Deutsche Bank is a major lender in the U.S. commercial real estate industry – and the No. 1 originator of CRE loans in New York City in 2017 – this additional uncertainty in Europe could potentially give a competitive edge to U.S. banks that compete with Deutsche and are less exposed to European volatility.
View the full CrediFi Lending Spotlight: New York City Edition to find out the biggest CRE lenders and CRE financing trends of 2017.
Deutsche Bank has exhibited a “delayed recognition of problems,” Chris Kotowski, senior analyst at New York-based investment firm Oppenheimer, told CNBC last week.
“They just seemed to value bigness over profitability for many years,” he said. “I think quite honestly that for the time being, it’s more of an opportunity for American banks than it is a risk.”
Deutsche’s biggest competitors on CRE origination in New York City include U.S. national lenders such as Wells Fargo, Morgan Stanley and JPMorgan, as well as regional lenders such as Signature Bank and New York Community Bank.
Deutsche Bank originated over $5 billion in mortgages for NYC commercial properties in 2017, a drop of 5% over the previous year. Wells Fargo was the No. 2 lender, with its origination growing 5% year-over-year.
The concerns regarding Italy are similar to those that previously surrounded Greece, which was the subject of the last Eurozone crisis and required bailouts from the International Monetary Fund and other institutions. This time the fears are compounded by the fact that Italy is the region’s third-largest economy and that European banks hold billions of euros of Italian government debt.
The political crisis revolves around the formation of a coalition, following Italian President Sergio Mattarella’s decision this week to veto the appointment of a finance minister who supports leaving the eurozone.
Some are concerned the fallout could lead to new elections just months after the previous election, in March, and that the political volatility could be a prelude to financial volatility, potentially increasing the risk that Italy will follow Britain out of the EU.
If the market reaction this week turns out to be less a blip and more a signal of serious things to come, such as an eventual “Exitaly,” U.S. lenders with limited exposure to Europe could be poised to benefit if highly exposed European competitors begin turning away from U.S. real estate.