A survey of commercial real estate exposure by U.S. regional banks reveals increasing asset risk and potential credit losses as loans mature over the next 18 months, Moody’s Investors Service said.
With U.S. banks providing more than half of U.S. commercial real estate debt financing, a survey of 55 banks by Moody’s shows that lenders have faced higher interest rates and a structural shift in demand as more people remain working from home after the COVID 19 pandemic.
“This has stressed the debt-servicing capacity of sponsors as commercial real estate valuations decline,” Moody’s analyst Stephen Lynch said in a research note. “At the same time, strained banking conditions have caused many banks to tighten underwriting, limited commercial real estate (CRE) lending activity.”
Banks are grappling with “material” commercial real estate maturities through 2024 that are about equal to 46% of the adjusted tangible common equity estimates by Moody’s. Tangible common equity (TCE) is used as a measure of a bank’s ability to absorb losses.
Moody’s survey of banks showed that higher risk office loans accounted for 26% of tangible common equity, while construction loans accounted for 30% of tangible common equity. These two loan types are “most likely to drive credit losses,” Lynch said.
Moody’s flagged other issues with banks including commercial real estate loans with properties that are currently generating insufficient cash flow to pay debt obligations. On this metric, the median bank had 13.5% of its tangible common equity exposed to commercial real estate loans with debt-service coverage ratios below 1.0 times.
In response to risks tied to commercial real estate loans, banks in the second quarter built up their loan loss allowance coverage. (See chart below).
Chart shows green diamonds where banks increased their loan loss allowance coverage for upcoming stresses in the second quarter compared to the prior quarter and red diamonds where loan loss allowance coverage dipped.
Moody’s investors Service
Banks that saw a decline in their loan loss allowance coverage in the second quarter compared to the previous quarter include Dime Community Bancshares
DCOM,
Principal Financial Group,
PFG,
Axos Financial
AX,
Old National Bancorp
ONB,
and Cadence Bank
CADE,
and First Merchants Bank
FRME,
Banks that have grown their loan loss allowance coverage include Prosperity Bancshares
PB,
Merchants Bancorp
MBIN,
New York Community Bancorp
NYCB,
Webster Financial
WBS,
Bank OZK
OZK,
United Bancshares
UBSI,
Synovus Financial
SNV,
Pinnacle Financial Partners
PNFP,
Fulton Financial
FULT,
Associated Bank
ASB,
Zions Bancorp
ZION,
M&T Bank
MTB,
BankUnited
BKU,
and Bank of Hawaii
BOH,
Also read: How the U.S. housing market got stuck in the ’80s
This story originally appeared on Marketwatch
