A recent survey conducted by Moody’s Investors Service has shed light on the growing risks and potential credit losses faced by U.S. regional banks in their commercial real estate exposure over the next 18 months.
Rising Challenges for U.S. Banks
In the United States, more than half of commercial real estate debt financing is provided by banks. However, these lenders have been confronted with higher interest rates and a significant shift in demand due to the ongoing impact of the COVID-19 pandemic, which has resulted in more people working from home.
As a consequence, commercial real estate valuations have declined, putting strain on sponsors’ ability to service their debts. Moody’s analyst Stephen Lynch noted in a research note that “strained banking conditions have caused many banks to tighten underwriting, leading to limited commercial real estate (CRE) lending activity.”
Highlighted Areas of Concern
The survey conducted by Moody’s highlighted two key areas of concern: higher-risk office loans and construction loans. These two types of loans were found to account for 26% and 30% of tangible common equity respectively, making them the primary drivers of potential credit losses.
Impending Maturities and Potential Losses
Looking ahead to the next few years, banks are now facing significant commercial real estate maturities that are estimated to be equivalent to approximately 46% of adjusted tangible common equity. Tangible common equity (TCE) serves as a crucial measure of a bank’s ability to absorb losses.
In conclusion, the survey conducted by Moody’s underscores the increasing risks and potential credit losses faced by U.S. regional banks in relation to their commercial real estate exposure. It is evident that these challenges are becoming a pressing concern as loans mature and banks grapple with tightened underwriting standards.
Moody’s Identifies Concerns with Banks’ Commercial Real Estate Loans
Moody’s, a leading financial rating agency, has raised concerns about the quality of commercial real estate loans held by banks. Specifically, they have flagged properties that are currently generating insufficient cash flow to cover debt obligations.
According to Moody’s analysis, the median bank has approximately 13.5% of its tangible common equity exposed to commercial real estate loans with debt-service coverage ratios below 1.0 times.
Banks Strengthen Loan Loss Allowance Coverage
In response to these risks, banks have taken steps to strengthen their loan loss allowance coverage during the second quarter of this year. The following chart illustrates the changes in loan loss allowance coverage for various banks:
Banks with Decreased Coverage:
- Dime Community Bancshares (DCOM)
- Principal Financial Group (PFG)
- Axos Financial (AX)
- Old National Bancorp (ONB)
- Cadence Bank (CADE)
- First Merchants Bank (FRME)
Banks with Increased Coverage:
- 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)
- Bank of Hawaii (BOH)
