JPMorgan Chase & Co. JPM, along with Texas-based private wealth manager Lone Star Funds, purchased a European portfolio with a face value of €2.2 billion from the German lender Commerzbank AG. The commercial real estate (CRE) portfolio comprised non-performing loans as well as other loans in Central and Eastern Europe, Turkey and Nordic countries.
Prior to the current deal, JPMorgan and Lone Star have acquired €4.4 billion worth of Commerzbank’s former Eurohypo Spanish commercial property lending business, known as Project Octopus, last year.
Along with the European portfolio, Commerzbank also sold €700 million worth of the German portfolio, which consisted primarily of non-performing CRE loans, to Oaktree Capital Management, a leading global alternative investment firm. Both the transactions were carried out at a discount of about 3%.
The deals come as part of Commerzbank’s efforts to cut back on non-core assets to lower risk and complexity. Moreover, the firm has been selling assets and restructuring its balance sheet in order to conform to stringent bank regulations.
While the sales will result in a positive net capital effect of around €105 million for Commerzbank, the firm will also have to recognize expected charges of €65 million in the second quarter and €20 million in the third quarter. Commerzbank intends to shrink its shipping credits and real estate assets holdings to below €20 billion by the end of 2016.
For JPMorgan, the deal will further enhance its international footprint. The improved economic environment in the U.S has led to the banks increasing their CRE exposure. JPMorgan’s CRE loan portfolio has grown at a compound annual growth rate of around 10% over the preceding five years.
With €12.2 billion of closed European CRE loan and real estate owned (REO) transactions recorded in the first quarter of 2015, the loan volumes in the second half of 2015 is expected be boosted by the €49.2 billion pipeline of live and planned sales. This indicates the right time to invest in the European portfolio, which is bound to work in JPMorgan’s favor going forward.
Among other major banks, Wells Fargo & Company WFC and Bank of America Corporation BAC have a large exposure in CRE lending, while Citigroup Inc. C has a comparatively lower real estate loan exposure.
Currently, JPMorgan carries a Zacks Rank #3 (Hold).
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