Banks are 25% through deleveraging process: Morgan Stanley

European banks have completed 20-25% of the commercial real estate deleveraging process, a faster pace than expected, according to a new research report published by Morgan Stanley.

'We estimate that 20-25% of the expected deleveraging has been done in the last 18 months, through a mix of sales, repayments, asset repossessions (especially in Spain) and some write-downs,' analysts Bart Gysens and Francesca Tondi said. 'This is a faster pace than we have witnessed in the past, and has likely been spurred by capital requirements, expensive funding and the need to increase return on equities for banks.'

Initial estimates of a bank financing gap in Europe of EUR 300-600 bn have been validated, Morgan Stanley said, and the range has now tightened towards the top end, with banks enlarging their original deleveraging plans and announcing new ones. The original EUR 100 bn risk from CMBS run-off and liquidating open-end funds also remains valid and has seen around 10% reduction so far.

During the last six months, the industry has seen a significant rise in investor interest in debt funds, increased bond issuance, a gradual step-up in lending by insurers, continued buying by sovereign wealth funds in Europe, and a higher likelihood for equity issuance by REITs. 'The rising interest in debt funds is particularly vital, as these funds target a broad asset quality spectrum. Admittedly, some of this is offset by regulatory pressures on CMBS origination, insurers and pension funds,' the report said.

A total of up to EUR 200 bn of capital is becoming available to replace reduced funding from traditional debt and equity capital providers. 'We estimate that year to date sources of "alternative" capital (i.e. anything other than bank debt) have redeployed enough capital and funding to explain around half of the CRE loans repayments to banks,' the report concluded.