Capital markets

CRE Crisis: Large Banks Struggle as Defaults Rise

Editorial staff

Editorial staff

— 2 min read
CRE Crisis: Large Banks Struggle as Defaults Rise
Photo by Miquel Parera / Unsplash

As reported by The Wall Street Journal

The Big Picture: Commercial real estate (CRE) troubles are hitting big banks harder than their smaller counterparts, despite market perceptions to the contrary.

By the numbers:

  • Stock Performance: The KBW Regional Banking Index is down around 12% this year, while the KBW Nasdaq Bank Index of larger lenders is up nearly 9%.
  • Loan Exposure: Smaller banks hold more than a quarter of U.S. CRE and multifamily property debt, double the share of the top 25 biggest banks.

Driving the news:

  • CRE Loan Differences: Unlike standardized credit-card loans, CRE loans vary widely. They can involve new construction or existing buildings, owner-occupied properties or those leased to tenants, and can be split between banks or held by one bank.
  • Loan Performance: Data from S&P Global Market Intelligence shows significant disparities in delinquency rates. Big banks, with over $100 billion in assets, saw more than 4.4% of their non-owner-occupied CRE loans delinquent or in nonaccrual status in Q1, up from the previous quarter. For smaller banks, this rate was below 1%.

Interest Rates Impact:

  • Owner-Occupied vs. Leased Properties: Owner-occupied CRE loans perform as long as the borrowing business is healthy. However, properties leased to tenants are more sensitive to interest rates, which can make loan payments difficult if rental income doesn't keep pace.

Geographical Factors:

  • Urban vs. Suburban: Geography also plays a role. Big banks often lend to downtown properties and face more immediate loan maturities. For instance, national banks held 29% of office debt maturing last year and 20% of this year's debt.

Financial Provisions:

  • Reserves: Larger banks have set aside significant provisions for potential office-loan losses. The median Q1 reserve ratio for office loans at major banks was 8%, compared to the sub-2% loss allowance ratio for all insured banks.
  • Charge-Off Rates: The net charge-off rate for non-owner-occupied CRE loans at large banks exceeded 1.1% in Q1, significantly higher than that of smaller banks.

What to watch:

  • Risk Balance: If a property downturn hits smaller or suburban properties more sharply, smaller banks could face more significant troubles.
  • Interest Rate Scenarios: A steady economy with higher-for-longer interest rates could favor smaller banks, potentially revealing value in their stocks despite current worries.

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