ALBAWABA – Bloomberg experts at the Bloomberg Invest conference Saturday warned that the United States (US) banking sector may be headed towards more trouble, with regional US banks more vulnerable today, in the face of a credit crunch.
A credit “contraction is invariably coming,” Soros Fund Management Chief Executive Officer Dawn Fitzpatrick said at this week’s conference, according to Bloomberg.
More banks will fail, she said, because “there are more problems under the surface.”
Another issue is the fact that regional and smaller-sized US banks have been working more in the commercial real estate sector.
Commercial real estate refers to offices, commercial centers, and any such properties used for commercial purposes.
Bad news for smaller US banks
The problem is, however, that working from home has cut into the value of office properties and commercial buildings. Meanwhile, a large chunk of commercial property debt is due for repayment before the end of 2025, an estimated $1.5 trillion, Bloomberg warned.
“US banks have become much more vulnerable to a decline in commercial real estate prices,” Torsten Slok, chief economist at Apollo Global Management Inc., wrote in an email to clients this week, as per Bloomberg.
The headwinds mean office values are now down 27 percent on average from their recent peak after falling further in the past month, according to Green Street. The average commercial property is down 15 percent.
Good news for smaller US banks
But around 700 US banks now exceed the Federal Deposit Insurance Corp.’s (FDIC) guidelines from 2006 on commercial real estate loan concentration, he added, so that’s good news.
Two years ago, it was less than half that number, Bloomberg highlighted. There were about 4,700 FDIC-insured US banks as of the end of March.
According to the New York-based news agency, those who exceed the guidelines are potentially subject to greater supervisory scrutiny. This includes higher capital levels and heightened risk management practices.
Notably, the guidelines were introduced in 2006 to address loan concentration and risk management deficiencies among banks in relation to commercial property loans.
In a statement last month, FDIC chairman Martin Gruenberg said that potential problems with property portfolios will be a matter of “ongoing supervisory attention.”
“Despite the recent period of stress, the banking industry has proven to be quite resilient,” he added.
Tides are changing for US banks
Some US banks are already downsizing their commercial real estate assets.
PacWest Bancorp is selling a $2.6 billion portfolio of real estate construction loans to shore up liquidity.
Smaller banks have the “lion’s share of the exposure” to commercial real estate (CRE), according to Monsur Hussain, head of research for global financial institutions at Fitch Ratings, as reported by Bloomberg
“They have approximately 14 percent of their total assets in CRE exposures, but it can be as high as over 40 percent of their total assets,” he said.
Prospects of smaller US banks
Any further regional bank failures would likely make credit even more difficult to access for property developers and landlords, Bloomberg explained.
Transactions in the commercial real estate sector are declining, as” buyers and sellers can’t seem to agree on pricing,” Peter Rothemund, co-head of strategic research at the firm, said in a report this week.
“These situations eventually resolve themselves, and usually it’s in favor of the buyers,” he added.
Trouble is also beginning to seep through to the commercial mortgage-backed securities (CMBS) market where about $140 billion of the assets are due to mature this year.
More than 4 percent of office loans packaged into the CMBS market were at least 30 days overdue as of May, according to a recent report by the real estate data firm, carried by Bloomberg. That’s the highest level since 2018.
“We expect commercial real estate more broadly to remain under pressure given the immediacy of the maturity wall at a time where the single-largest lender – regional banks – is experiencing an elevated rate of scrutiny,” Morgan Stanley analysts including Jay Bacow wrote this week.
