Commercial property is often seen as a problem for small banks, but the data shows that large banks have been hit even harder.
Commercial property is often seen as a problem for small banks, but data shows that large banks have been more affected so far.
Although this has not been reflected in the stock market. The value of office buildings, apartment buildings or other commercial properties has been falling and has been an influencing factor on all bank stock prices, particularly for small banks. The KBW Regional Banking Index has fallen by about 12% this year, while the KBW Nasdaq Bank Index, which reflects large banks, has risen by nearly 9%.
According to a recent analysis report by Moody's, regional banks, community banks and smaller banks account for over a quarter of commercial real estate and multi-family housing debt in the United States, more than twice the proportion of the top 25 banks.
However, not all so-called commercial real estate loans are of equal size.
Loan types like credit cards are fairly standardized, but the real estate sector is very ambiguous. According to S&P Global Market Intelligence's compilation of first-quarter data from regulatory filings, there are significant differences in the proportion of loans marked as delinquent or nonperforming loans (loans that banks expect to not be fully repaid when due)
And the problem lies with large banks and their loans for properties intended for third-party rental. For commercial real estate loans on properties held by banks with over 100 billion dollars in assets and not owned by owner-occupiers, delinquent or non-performing loans accounted for more than 4.4% in the first quarter. This was a 0.3 percentage point increase from the previous quarter. Meanwhile, the proportion of non-performing loans or delinquent loans in the first quarter for banks in each size category below 100 billion dollars, as well as their own loans for those larger banks, was less than 1%.
This difference can be attributed to higher interest rates. Nathan Stovall, director of financial institution research at S&P Global Market Intelligence, said that owner-occupied commercial real estate loans perform well as long as the borrowing companies themselves are healthy and capable of repaying the loans. However, rental properties are much more sensitive to interest rate levels. If the revenue from the property cannot keep up with the cost of paying off the loan or cannot refinance the loan due to occupancy rates or current rent, the loan may become problematic.
This difference may also reflect geographic differences, such as between cities and suburbs. Large banks may also face expiration problems with certain key types of loans. According to an analysis by MSCI Real Assets in March, in tracking bonds that expired last year, national banks held 29% and for bonds expiring this year, they held 20%. The share of regional and local banks was 16% last year and 13% this year.
The structure of commercial real estate loans typically involves a large repayment of principal at maturity. Banks with loan repayment dates coming soon would do well to scrutinize these loans' repayment likelihood.
Many large banks have made large reserves for office building loan losses. The median reserve rate for bank office building loans tracked by Morgan Stanley analysts in the first quarter was 8%. According to data from the U.S. Federal Deposit Insurance Corporation, this ratio is much higher than the loss reserve ratio below 2% for all insured banks and all loan categories.
According to data from S&P Global Market Intelligence, the net write-down rate for commercial real estate loans not held for their own account by banks with assets of more than 100 billion dollars was more than 1.1% in the first quarter, about one percentage point or more higher than that for small banks, although this ratio was down more than four-tenths of a percentage point from the previous quarter.
It is certain that today's problems are also past risks, so the question now is where the balance of risk may lie. If the downturn in real estate has a greater impact on small or suburban properties or on businesses, then small or regional banks holding such loans may become uneasy.
On the other hand, in a stable economy, keeping interest rates high for a longer period of time may be advantageous for smaller banks. In this case, the value of these stocks may be hidden behind people's concerns.
Editor/ping