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U.S. banks, particularly smaller ones, have been in the spotlight over the past year due to their excessive credit exposure to the $20 trillion commercial real estate market, which has faced two financial headwinds, exacerbated by high interest rates and the reduction of offices. employment driven by the widespread shift to remote working.
As of 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 pointed out 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 falls on these smaller ‘community’ banks and therefore CRE does not pose a risk to the banking system as a whole”.
Banks’ exposure to CRE returned to center stage after commercial real estate lender New York Community Bancorp (NYSE: NYCB) revealed in January a surprise quarterly loss and a huge fee on potential loan losses. Although an investor group 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 note on global financial stability that the large presence of CRE exposures represents “a serious risk for small and large banks in an environment of economic uncertainty and higher interest rates , potentially declining real estate values and deteriorating asset quality.
In the fourth quarter of 2023, “a subset of banks were left with exceptionally high CRE concentrations for which losses could compromise their safety and soundness… The turmoil also serves as a stark reminder of the impact that rapidly rising interest rates increase may have interacted with underlying financial vulnerabilities,” the International Monetary Fund added.
Below is a breakdown of lenders with the highest concentration of CRE loans as of Q3 2023. Banks’ CRE share of total loans represents non-agricultural/non-residential non-owner-occupied, multifamily, construction and land development CRE and not guaranteed.
- OZK Bank (NASDAQ:OZK): CRE share of total loans – 68.6%; total CRE loans – $17.4 billion; total assets $32.8 billion.
- Home BankShares (NYSE:HOMB): 63.0%; $9.0 billion; $22.0 billion
- Pacific Premier Bancorp (NASDAQ: PPBI): 63.0%; $8.4 billion; $20.3 billion
- International Bancshares Corp. (NASDAQ:IBOC): 59.3%; $4.7 billion; $14.9 billion
- New York Community Bancorp (NYCB): 57.0%; $49.0 billion; $111.2 billion
- Independent Banking Group (NASDAQ:IBTX): 56.1%; $8.0 billion; $18.5 billion
- Valley National Bancorp (NASDAQ:VLY): 54.9%; $27.5 billion; $61.2 billion
- CVB Financial Corp. (NASDAQ: CVBF): 50.2%; $4.5 billion; $15.9 billion
- Independent banking company (NASDAQ:INDB): 48.9%; $7.0 billion; $19.4 billion
- Axos Financial (NYSE:AX): 48.6%; $8.3 billion; $20.8 billion
- Simmons First National Corp. (NASDAQ:SFNC): 48.2%; $8.1 billion; $27.6 billion
- Shares of United Banks (NASDAQ:UBSI): 46.2%; $9.8 billion; $29.2 billion
- WaFd (NASDAQ:WAFD): 45.9%; $8.1 billion; $22.5 billion
- ServisFirst Bancshares (NYSE:SFBS): 44.9%; $5.2 billion; $16.0 billion
- WesBanco (NASDAQ:WSBC): 43.4%; $4.9 billion; $17.3 billion
- Banner Corp. (NASDAQ:BANR): 42.9%; $4.6 billion; $15.5 billion
- Towne Bank (NASDAQ: CITY): 42.6%; $4.8 billion; $16.7 billion
- Renasant Corp. (NYSE:RNST): 42.4%; $5.3 billion; $17.2 billion
- FB Financial Corp. (NYSE:FBK): 42.3%; $4.0 billion; $12.5 billion
- Glacier Bancorp (NYSE:GBCI): 42.0%; $6.8 billion; $28.1 billion
The worst begins to fade into the past
Indeed, CRE prices are starting to recover after peaking in early 2022. Office prices, which have suffered most from record vacancies spurred by the shift to remote work during the pandemic, also appear to be stabilizing to -15% Y. /Y in January 2024, noted Apollo Chief Economist Torsten Slok. Domestic, condo and CRE retail prices are recovering at a faster pace, but remain down about 5% to 10% from a year ago. The industrial sector is the best, with prices increasing slightly year-on-year.
“This is helpful for regional banks and the broader economic recovery,” Slok said in a note.
Some Wall Street heavyweights, including Goldman Sachs (GS) Asset Management, now see a time to return to the U.S. real estate market.
“We don’t think it’s going to be a very sharp V-shaped recovery; we think we’re going to be bottoming out for a while while a lot of these overleveraged situations in the asset class are resolved,” Jim Garman, head of the real estate unit at Goldman Sachs Asset Management told Reuters in a recent interview.