Deutsche Bank has pointed out that it has a risk exposure of 26 billion euros (30 billion US dollars) in the private credit sector. This asset class is currently facing issues such as fund redemptions, reviews of underwriting standards, and the impact of artificial intelligence on some borrowers like software manufacturers.
According to the annual report released by the German bank on Thursday, its private credit portfolio (calculated on an amortized cost basis) rose to 25.9 billion euros last year, up from 24.5 billion euros in 2024. The bank stated that it does not face “significant risks” related to non-bank financial institutions, but it may be exposed to potential indirect risks due to interrelated investment portfolios and counterparties.
Deutsche Bank also said on Thursday that it faced a potential litigation risk of $1 billion. Its share price dropped by 6.1% at 4:50 p.m. in Frankfurt, and is expected to record its biggest one-day decline since April.
The $1.8 trillion private credit market is facing a wave of investor withdrawals. This follows a series of high-profile corporate bankruptcies that have raised concerns about the quality of loans and exposure to software companies, whose business models are under threat from the rapid development of artificial intelligence. JPMorgan Chase has restricted some loans to private credit funds after writing down the value of some of its loans.
Recently, the collapse of the British mortgage lender Market Financial Solutions Ltd has brought a huge credit shock to banks and private lenders. The company is currently facing fraud charges. Last year, the bankruptcies of the US auto parts supplier First Brands Group LLC and the subprime auto lender Tricolor Holdings LLC also triggered similar accusations.
Deutsche Bank said in its report: “The collapse of some subprime lenders in the United States has intensified investors’ concerns about private credit risks and triggered broader worries about underwriting standards and fraud risks.”
Deutsche Bank’s approximately $30 billion exposure will make it one of the larger such asset lenders among its Wall Street peers. Moody’s said in October that as of the end of June, U.S. banks had extended about $300 billion in loans to private credit firms, with Wells Fargo topping the list with an exposure of about $60 billion.
A study released by UBS in December showed that Deutsche Bank has the largest exposure to non-bank financial institutions among European lenders. About 30% of the German bank’s loans, advances and debt securities are related to investment companies, funds, insurance companies, pension funds, clearing institutions and other financial intermediaries, while the average exposure of large European banks is only 8%.
UBS analysts said at the time that they had adopted a broad definition of non-bank financial institutions and expected that many of them would have sufficient collateral and low risk. Therefore, it would be unwise to assume that all the risk exposures of “other financial companies” were of similar type and risk.
Deutsche Bank said its private credit exposure accounted for about 5% of its loan portfolio. Although the bank listed such assets as a “key risk”, it did not mention any losses or provisions related to its private credit exposure.
Analysts at Kepler Chevreux said in a report to clients: “We believe that both private credit and technology investments are well managed and at present we do not see any particularly worrying issues.”
Deutsche Bank stated that approximately 73% of its risk exposure is invested in “multi-asset loan institutions (ABS) collateralized by highly diversified medium-sized enterprise loans across various industries in the United States and the European Union, with a conservative loan issuance rate of around 65% and almost all being investment grade”. The remaining risk exposure is “diversified across net asset value (NAV) financing of single and multi-asset loan institutions, single-asset financing, non-bank commercial real estate loans, business development companies (BDCs), and subscription financing”.
Deutsche Bank’s annual report shows that its loan exposure to the technology sector (including the software industry) was 15.8 billion euros on an amortized cost basis, up from 11.7 billion euros in the same period last year. A person familiar with the matter said last month that the German bank and several other lenders jointly held about $1.2 billion in loans that were originally intended to support the acquisition of a software provider, but the deal has stalled, a rare situation.
