REAL ESTATE NEWS

Even Big Banks Are Getting Hurt By CRE

The idea that only smaller banks are facing trouble from CRE loan portfolios is now out the door.

As concern about commercial real estate loans sitting in banks' portfolios has grown, the general assumption has been that smaller banks were in real trouble. Large banks and even regionals had smaller percentages of their assets tied up in CRE lending. That view is changing rapidly.

The Wall Street Journal reported that data suggests larger banks, while holding smaller portions of CRE debt overall, are facing a lot of loans in risky states. The data, from S&P Global Market Intelligence analysis of Q1 regulatory findings, found higher percentages of loans that were either delinquent or nonaccrual.

Many loans by smaller banks are on multifamily projects or owner-occupied commercial properties. These can be more stable, as they don't depend on a few tenants that can and will stay and pay rent for extended periods.

Large banks, however, more often lend to owners and developers who depend on third parties that will pay the necessary rent. The Q1 numbers underline the problem. Banks with more than $100 billion in assets regulators' definition of large with loans on non-owner-occupied buildings, saw 4.4% in delinquent or nonaccrual status in 2024 Q1, up 30 basis points from 2023 Q4. The net charge-off rate for those banks and loans was more than 1.1% n Q1.

For banks below $100 billion in assets, or big banks with owner-occupied loans, the percentage delinquent or nonaccrual was under 1.0%.

Not that the largest banks are the only ones under a watchful eye. In June, Moody's put six banks on review for credit downgrades. Moody's concern was over the valuations of CRE loans and the ultimate ability of the borrowers to refinance their properties or add enough equity to settle their debts.

Reuters pulled together a list of banks that seem on risky ground. They used the S&P Global Market Intelligence analysis of ratios between total CRE loan ratios and Tier 1 capital. The latter, according to the Bank for International Settlements, is the highest quality of regulatory capital in a bank that keeps it a going concern. The higher the ratio between CRE loans and Tier 1 capital, the weaker the bank's ability to cover significant loan defaults.

The Reuter's list is a dozen banks with CRE loans-to-Tier 1 capital ratios of 530 (American Price Bank) to 623 (Hingham Institution for Savings). These are smaller banks with between $360 million and $9.45 billion in assets.

While there are these amounts of concern about bank positions in CRE loans, the chances of easier financing are unlikely to happen.


Source: GlobeSt/ALM