U.S. banks have boosted their provisions for credit losses as deteriorating commercial real estate (CRE) loans and high interest rates fuel fears of defaults, the regional lenders' second-quarter results show. Some, such as M&T Bank (MTB), are also gradually reducing their exposure to the troubled CRE sector and repositioning their balance sheets to focus on commercial and industrial lending and build capital. Office loans have been hit the hardest over the past 12 months as buildings remain vacant due to the post-pandemic adoption of remote working models. The shift has hurt landlords who have been unable to pay back mortgages, while options to refinance the properties have been constrained by higher rates.
BankUnited (BKU), which according to data from S&P Market Intelligence, had one of the largest CRE exposures by loan volume, revealed office loans accounted for 30% of its total CRE loan book. Office portfolio allowance for credit losses climbed to 2.47% at the bank as of June 30, compared to 2.26% at the end of the first quarter, and just 1.18% at the close of 2023. Meanwhile, multi-family commercial loan portfolios - most of which are made by smaller U.S. lenders - have also shown signs of strain in major markets such as New York and Florida due to rent control regulations. "As is common industry practice after a time of extended elevated interest rates, some cracks are beginning to show," said Jeff Holzmann, COO at RREAF Holdings.
Market Overview:- U.S. banks boost provisions for credit losses due to CRE loans.
- BankUnited's office loans accounted for 30% of its total CRE loan book.
- Multi-family commercial loan portfolios show signs of strain.
- KeyCorp's (KEY) net-charge offs for CRE rose in the second quarter.
- Bank OZK (OZK) raised its total allowance for credit losses.
- Lenders are not aggressively selling down CRE loans.
- Potential interest rate cuts may impact banks' loan sale strategies.
- Investor scrutiny on loan books of NYCB and First Foundation.
- Continued monitoring of CRE exposure in banks' portfolios.
At KeyCorp, net-charge offs to average loans for CRE rose to 0.21% in the second quarter, from 0.14% in the previous quarter. Non-performing office loans at the bank increased to 5.5% from 5.2% over the same period. Bank OZK raised its total allowance for credit losses to $574.1 million in the second quarter, compared with $426.8 million in the year-ago period. Net charge-offs, or debt unlikely to be recovered, rose to $11.8 million from $8.7 million over the same period. "It's imperative that banks have rigorously scrutinized their CRE portfolios," said Blake Coules, CRE industry practice lead at Moody's.
Earnings reports so far this week show lenders are not aggressively selling down their CRE loans and are allowing them to run off the balance sheet naturally instead. Some had expected regional banks to dump their toxic assets in distress sales, triggered by the panic sparked by New York Community Bancorp's (NYCB) troubles earlier this year. "I think loan sales are possible. But flooding the market with supply is not necessarily what's going to happen," said KBW analyst Chris McGratty. Banks might also wait for the Federal Reserve to cut interest rates, widely expected later this year, before putting their loan books up for sale. The cuts could help them fetch higher prices for those assets.
