Analysis: US regional banks seen booking more commercial property losses, loan sales

Walker & Dunlop

17/04/2024 11:34

(Repeats with no change to text, adds codes)
    By Saeed Azhar and Matt Tracy
       April 17 (Reuters) - U.S. regional banks are expected to
set aside more money to cover potential commercial real estate
(CRE) losses and sell more property loans as the sector remains
under pressure a year after the collapse of Silicon Valley Bank
and Signature Bank.
    Most multifamily loans are made by regional banks, so when
New York Community Bank  NYCB.N  posted a surprise
fourth-quarter loss it intensified fears about the industry's
exposure to commercial real estate. Multifamily properties with
more than five units are a major concern, especially since the
bank had booked losses on its real estate portfolio.
    Scrutiny of regional banks has increased after Silicon
Valley Bank's collapse prompted by high borrowing costs that
exceeded its income from low-rate loans following the Federal
Reserve's aggressive rate hikes since March 2022. Many banks
have unrealized losses on securities portfolios, including
mortgage-backed paper.
    A slew of regional banks report first-quarter earnings
starting April 16.
    "I expect to see more of a reserve buildup," said Stephen
Buschbom, research director at consultancy Trepp.
    Buschbom said office loans remain the "biggest pain points"
for banks, but he also expects stress in the multifamily sector
especially construction loans.
    Office loans have been hit as many employees still work from
home after the pandemic, leaving vacancies that make it tougher
for building owners to repay their mortgages. Multifamily is
also under pressure in cities like New York and San Francisco
that, right before the pandemic, severely limited rent hikes on
regulated apartments based on record low interest rates and
inflation at the time.
        Non-performing CRE loans as a percentage of U.S. banks'
portfolios doubled to 0.81% by the end of 2023 from 0.4% a year
earlier, the International Monetary Fund said in its semi-annual
Global Financial Stability report. Banks have continued to
increase provisions for bad CRE loans, the IMF noted on Tuesday.
    Several analysts and investors are predicting higher
reserves. Morgan Stanley forecast a 10- to 20-basis point
increase in CRE reserve ratios for regional banks this year,
said Manan Gosalia, an analyst at the Wall Street bank, in a
research note. Aggregate provisions are 20% above consensus, she
added.
    Stephen Biggar of Argus Research agreed, saying high office
vacancies have reduced cash flows, and the Fed's stance on
keeping interest rates higher for longer makes financing
expensive.
    CRE holdings are significant across the U.S. banking
industry, comprising 13% of large banks' balance sheets and 44%
for regional banks, an Ares Alternative Credit report showed.
        Reflecting investor sentiment, the KBW regional bank
index  .KRX  is down 13.5% year to date versus the S&P bank
index's  .SPXB  6.8% rise.
    S&P Global Ratings downgraded the outlook for five U.S.
banks in March because of stress in CRE markets, which it said
may hurt their asset quality and performance. 
    The banks cited, including M&T Bank  MTB.N  and Valley
National Bancorp  VLY.O , declined to comment.
    "The CRE delinquency rate for banks is more benign than the
commercial mortgage-backed securities market, but
deteriorating," Stuart Plesser, managing director (at rating
agency S&P Global Ratings, told Reuters, saying he sees some
reserve increase for banks.
    The delinquency rate at regional banks is 1.2% for loans 30
days due as of the end of the fourth quarter, according to S&P
Global, below the 4% for CMBS.
    Buschbom, however, said the level of support from potential
buyers, including private equity investors, will help reduce
some downside risks for banks. Office loans are selling at deep
discounts, while multifamily properties have smaller discounts,
industry sources said.
    "Numerous community and regional banks are exploring their
options and, as a result, we are seeing more deal flow than we
have since the global financial crisis," said David Aviram,
co-founder of real estate investment firm Maverick Real Estate
Partners.
    A senior Wall Street banker who declined to be named
discussing sensitive information said banks are expected to
offload existing loans to private lenders and that those lenders
would originate new loans.
    Among such deals, regional lender PacWest last year sold
construction loans with a $200 million discount, a regulatory
filing showed.
    In December Signature Bridge Bank, whose predecessor
Signature Bank collapsed in 2023, sold 20% of its equity stake
in a venture that held a $16.8 billion real estate loan
portfolio to a Blackstone-led  BX.N  consortium for $1.2
billion. The discount on the portfolio was nearly 30%, based on
data from the announcement by Blackstone.
    "We see banks taking a more conservative approach and
anticipate additional write-offs in coming quarters," said Ran
Eliasaf, founder and managing partner at Northwind Group, a
private equity firm over $3 billion assets under management.
    "There's a much more dramatic drop in values than what the
market estimated in 2023."
    Analysts, however, do not expect turmoil from the banking
sector's exposure to commercial real estate.
    "This is a slow wreck, not a high-speed crash," said Biggar
of Argus Research.


 (Reporting by Saeed Azhar and Matt Tracy; editing by Megan
Davies and Richard Chang)
 ((Saeed.Azhar@thomsonreuters.com;
Matt.Tracy@thomsonreuters.com))