Private credit alert sounds! Deutsche Bank's €26 billion exposure sparks market shockwaves

Amid multiple corporate defaults and market fund withdrawals, Deutsche Bank has for the first time classified private credit as a key risk category. Although no losses have been disclosed, its €26 billion exposure remains a market focus due to potential risks in this area.

Deutsche Bank (DB.N) warns of approximately €26 billion ($28 billion) in risk exposure in its private credit sector. This asset class is currently facing fund redemptions, underwriting standards reviews, and impacts from artificial intelligence on borrowers such as software companies.

According to the bank’s annual report released Thursday, Deutsche Bank’s private credit portfolio increased to €25.9 billion (at amortized cost) last year, up from €24.5 billion in 2024. Deutsche Bank states that private credit exposure accounts for about 5% of total loans.

While the bank lists this asset class as a “key risk,” it did not mention any losses or provisions related to private credit exposure.

The bank also notes that it does not have “material risk exposure” to non-bank financial institutions, but may face potential indirect risks through interconnected investment portfolios and counterparties.

Private Credit Market Risks Intensify

The approximately $1.8 trillion private credit market is showing signs of investor withdrawals, following several high-profile corporate defaults that have heightened concerns over loan quality and exposure to software companies, whose business models are threatened by rapid AI development.

JPMorgan (JPM.N) has begun restricting loans to certain private credit funds after impairing some of its loans.

The latest credit shock affecting both banks and private lenders was the collapse of UK mortgage lender Market Financial Solutions Ltd, which is currently facing fraud allegations. Last year, failures of US auto parts supplier First Brands Group LLC and subprime auto lender Tricolor Holdings LLC also triggered similar misconduct concerns.

Deutsche Bank’s report states: “The default of a few US subprime lenders has heightened investor concerns about risks related to private credit and raised broader worries about underwriting standards and fraud risks.”

One of the largest exposures among European banks

With about $30 billion in risk exposure, Deutsche Bank’s loan size in this asset class is relatively high compared to its Wall Street peers. Moody’s in October noted that as of June, US banks had approximately $300 billion in loans to private credit institutions, with Wells Fargo (WFC.N) leading at about $60 billion.

A December report from UBS (UBS.N) showed that Deutsche Bank has the largest exposure to non-bank financial institutions among European banks. About 30% of its loans, advances, and debt securities are related to investment firms, funds, insurance companies, pension funds, clearinghouses, and other financial intermediaries, whereas the average exposure for Europe’s largest banks is only 8%.

UBS analysts at the time said they used a broad definition of non-bank financial institutions, many of which are expected to be fully collateralized and carry lower risk, so not all “other financial companies” exposures should be assumed to have the same risk profile.

Kepler Cheuvreux analysts stated in a client report: “We believe private credit and tech sector exposures are well managed, and we see no particularly concerning risk sources at this time.”

Rising Tech Sector Loan Exposure

Deutsche Bank states that about 73% of its exposure comes from “multi-asset loan originator financing (ABS),” which consists of highly diversified pools of loans to mid-market US and EU companies, covering multiple industries, with loan-to-value ratios around 65%, and nearly all rated investment grade.

The remaining exposure is “diversified across single-asset and multi-asset loan originator net asset value (NAV) financing, single-asset financing, non-bank commercial real estate loans, business development companies (BDCs), and subscription financing.”

The annual report shows Deutsche Bank’s loan exposure to the tech industry (including software) at €15.8 billion, up from €11.7 billion previously. Sources last month indicated that the bank is part of a lending group currently unable to sell about $1.2 billion in loans, which financed a software supplier acquisition, forming a rare “stuck deal.”

Deutsche Bank also warned of potential litigation risks up to $1 billion on Thursday.

Despite highlighting private credit risks, Deutsche Bank’s asset management subsidiary DWS Group plans to expand its private credit business. The bank states it intends to grow distribution channels through selective regional expansion and collaboration with private banks to develop innovative products and digital investment solutions.