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American banks, particularly smaller ones, have been in the spotlight over the past year due to their huge lending exposure to the $20 trillion commercial real estate market, which has faced twin headwinds of financial challenges exacerbated by the high interest rates and the decline of offices. occupation driven by the widespread shift toward remote work.
In the third quarter of 2023, the majority of outstanding CRE loans (56.1%) were held by small banks with less than $20 billion in assets, UBS said in a note to clients last month. By comparison, large banks, with an asset base of more than $250 billion, held 22% of that debt. This implies that “the greatest risk lies with these smaller 'community' banks and, therefore, CRE is not a risk to the banking system as a whole.”
Banks' exposure to CRE took center stage again after commercial property lender New York Community Bancorp (New York Stock Exchange: NYCB) in January revealed a surprise quarterly loss and a huge charge against potential credit losses. Although a group of investors led by former Treasury Secretary Steven Mnuchin recently stepped in to offer a $1 billion lifeline, concerns remain about the bank's ties to CRE.
Earlier this month, the International Monetary Fund warned in a global financial stability note that the large presence of CRE exposures poses “a serious risk to banks large and small amid economic uncertainty and higher interest rates, the potential decline in property values and the deterioration in asset quality.
In the fourth quarter of 2023, “a subset of banks remained with an exceptionally high concentration of CRE, the losses of which could compromise their safety and soundness… The turmoil also serves as a stark reminder of the impact that rapidly rising interest rates interest may have when interacting with underlying financial vulnerabilities. ”added the IMF.
Below is a breakdown of the lenders with the highest concentration of CRE loans as of Q3 2023. Banks' CRE share of total loans represents non-farm/non-residential, multifamily, construction and occupied land development CRE by non-owners and unsecured CRE.
- OZK Bank (NASDAQ:OZK): CRE share in total loans: 68.6%; Total CRE loans: $17.4 billion; Total assets $32.8 billion.
- Home BancShares (New York Stock Exchange: HOMB): 63.0%; 9 billion dollars; 22 billion dollars
- Pacific Premier Bancorp (NASDAQ:PPBI): 63.0%; 8.4 billion dollars; $20.3 billion
- Bancshares International Corp. (NASDAQ:IBOC): 59.3%; 4.7 billion dollars; $14.9 billion
- New York Community Bank (NYCB): 57.0%; 49 billion dollars; $111.2 billion
- Independent banking group (NASDAQ:IBTX): 56.1%; 8 billion dollars; 18.5 billion dollars
- National Bank of the Valley (NASDAQ:VLY): 54.9%; $27.5 billion; $61.2 billion
- CVB Financiera Corp. (NASDAQ: CVBF): 50.2%; 4.5 billion dollars; $15.9 billion
- Independent Banking Corporation (NASDAQ:INDB): 48.9%; 7 billion dollars; $19.4 billion
- Axos Financial (New York Stock Exchange: AX): 48.6%; 8.3 billion dollars; $20.8 billion
- Simmons First National Corporation (NASDAQ:SFNC): 48.2%; 8.1 billion dollars; $27.6 billion
- United Banks Stock (NASDAQ:UBSI): 46.2%; 9.8 billion dollars; $29.2 billion
- WaFd (NASDAQ:WAFD): 45.9%; 8.1 billion dollars; $22.5 billion
- ServisFirst Bancshares (New York Stock Exchange: SFBS): 44.9%; 5.2 billion dollars; 16 billion dollars
- WesBanco (NASDAQ:WSBC): 43.4%; 4.9 billion dollars; $17.3 billion
- Banner Corp. (NASDAQ:BANR): 42.9%; 4.6 billion dollars; 15.5 billion dollars
- TowneBank (NASDAQ: CITY): 42.6%; 4.8 billion dollars; $16.7 billion
- Renasant Corp. (New York Stock Exchange:RNST): 42.4%; 5.3 billion dollars; 17.2 billion dollars
- FB Financial Corp. (New York Stock Exchange: FBK): 42.3%; 4 billion dollars; 12.5 billion dollars
- Bancorp Glacier (New York Stock Exchange:GBCI): 42.0%; 6.8 billion dollars; $28.1 billion
The worst is beginning to fade into the past.
In fact, depressed CRE prices are starting to recover after peaking in early 2022. Even office prices, which have been especially affected by record vacancies driven by the shift to remote work during the pandemic, seem to be stabilizing at -15% annually. /And in January 2024, said Apollo chief economist Torsten Slok. Domestic, apartment and retail CRE prices are recovering at a faster pace, but remain down 5% to 10% from a year ago. The industrial sector is the leader, with prices rising slightly year-on-year.
“This is helpful for regional banks and for economic recovery in general,” Slok said in a note.
Some Wall Street heavyweights, including Goldman Sachs (GS) Asset Management, see now as the time to return to the US housing market.
“We don't think it's going to be a very sharp V-shaped recovery; we think we're going to bottom out for a while as a lot of these overleverage situations in this asset class are resolved.” Jim Garman, head of the real estate unit at Goldman Sachs Asset Management, told Reuters in a recent interview.
