Big US banks withstand Fed's commercial real estate shock scenario

Citizens Financial

26/06/2024 23:25

By Michelle Conlin
       NEW YORK, June 26 (Reuters) - Big U.S. banks survived a
hypothetical 40% drop in commercial real estate values as a part
of the U.S. Federal Reserve's annual health test, easing fears
about the banking sector as landlords struggle in a
higher-for-longer interest rate world. 
    As risks mount in the CRE space, investors were looking to
the Fed's "stress tests" to assess how exposed America's lenders
are at a time when pandemic-era work habits continue to empty
office towers, sending vacancy rates past historic peaks to a
record 20%.  
    “In a lot of respects, there should be a sense of comfort
that banks can weather a very nasty storm,” said Chris Marinac,
head of research at Janney Montgomery Scott. "Though this
doesn’t mean the Fed thinks commercial real estate is out of the
woods. It’s still early innings in this credit cycle.”
    The Fed's emergency drill tests banks' balance sheets
against an imagined severe economic downturn that also includes
a 36% decline in U.S. home prices, a 55% drop in equity prices
and an unemployment rate of 10%.
    The results, released on Wednesday by the Fed, examine
whether banks would be able to continue lending to households
and businesses in the event of a severe global recession. They
also indicate the amount of capital banks need to be considered
healthy - and how much they can return to shareholders through
dividends and buybacks. 
    The 31 large banks tested showed they have sufficient
capital to absorb nearly $685 billion in losses. 
    The Fed's disaster test comes more than a year after the
collapse of mid-size lenders Silicon Valley Bank, Signature Bank
and First Republic. Those failures prompted criticism that the
Fed had failed to gauge banks' vulnerabilities against rising
interest rates; instead, the Fed imagined interest rates would
fall amid a severe recession. 
    Commercial office space is being closely watched as $929
billion of the $4.7 trillion of outstanding commercial mortgages
held by lenders and investors will come due in 2024, according
to the Mortgage Bankers Association. This looming maturity wall
comes against a backdrop of declining property values and lower
rent rolls.
    Analysts predict a painful reckoning for CRE, with banks
still retaining "considerable concentration risks," according to
Moody's Ratings. 
    Of the banks tested, Goldman Sachs had the highest projected
loan loss for commercial real estate, at 15.9%. RBC USA, Capital
One and Northern Trust followed, with projections at 15.8%,
14.6% and 13%, respectively.  
    One criticism of the Fed's stress test by analysts was that
it did not include the regional banks that hold the majority of
CRE loans. Regional lenders are also less regulated than their
larger peers.    

 (Reporting By Michelle Conlin, editing by Deepa Babington)
 ((Michelle.Conlin@thomsonreuters.com; 646-223-5660;))