Regional US Banks might sell commercial real estate loans

After exceeding important regulatory criteria for exposure to the ailing industry, several regional U.S. lenders might have to think about selling off the commercial real estate (CRE) borrowings at a significant discount, based on fresh data and similar market sources.

Regional banks have decreased their exposure to this sector by making stricter standards and making way fewer loans.

This has been especially true in the weeks following the full tanking of Silicon Valley Bank, First Republic Bank, along with Signature Bank, the three largest lenders to the troubled U.S. CRE or construction markets.

Their tightening coincides with a reduction in office use and a slide-off in property values due to recessionary worries, as well as the fact that many real estate debtors are having trouble making interest purchases in an environment of hiking interest rates.

Nevertheless, previously unreleased statistics from New York-based Trepp, a source of real estate data shows that many regional banks have holdings that are higher than the limits set by authorities.

Based on 2006 guidance from the Fed Deposit Insurance Corporation and similar regulators, banks can anticipate increased regulatory scrutiny if their CRE or their construction loans’ holdings are more than 300% or 100% of their outstanding assets, respectively.

763 banks have either a simple CRE or construction loan concrete ratio that exceeds these standards, according to a Trepp analysis of 4,760 banks’ publicly available regulatory data that was released late on Tuesday.

In comparison, 23% of banks with assets between $10 billion and $50 billion and 30% of banks with assets between $1 billion and $10 billion had at least one ratio that they had above.

Despite recent CRE exposure warnings from major banks, the new Trepp data highlights how severe and pervasive the issue is in the banking industry.

Given the context of CRE worries, if people happen to exceed these concentration ratios now, there will likely be a lot of hesitation to continue lending, according to Trepp’s research director and head Stephen Buschbom.

Going with the regulatory guidances, banks that surpass these criteria must use more aggressive risk management techniques, which may include possible loan sales.

The CRE & construction loan criteria were exceeded by PacWest (PACW.O), that on May 3 indicated it was thinking about a possible sale, as of the initial quarter, or so is told by Trepp data, at 328% – 126%, respectively.

Flagstar Bank along with New York Community Bancorp (NYCB.N) were two of the top five banks recognised by Trepp that had exceeded the total CRE loan threshold. Although the banks amalgamated in December of last year, they nevertheless disclose their financial information individually.

According to further information Trepp provided, other institutions that surpassed one or both ratios included Valley National Bancorp (VLY.O), Western Alliance Bank, East West Bank, Synovus Bank, M&T Bank. and CIBC Bancorp USA. 

The other lenders refused to respond to requests for comment, with the exception of Western Alliance & Valley National.

Martin Gruenberg, the head of the FDIC, warned that issues could arise for the CRE loan portfolios if the current market conditions continue.

Exposed banks may likely reduce their lending in order to let their CRE debt amortise. As seen in guidelines and experts, in the most extreme circumstances, they might even sell all or a portion of their current loan books.

There are so many tenants who are minimising their physical presence in buildings, which increases supply and pushes rents lower.

Going along with it, Mike Brotschol, a managing director and the co-head of KBRA Credit Profile, noted that the current situation for office assets is kind of like a perfect storm.

About 21% of existing office loans in pure commercial mortgage-aided securities, as noted in a March research from JPMorgan (JPM.N), are expected to eventually default.

Ben Miller, a co-founder and CEO of the alternative and growing investment platform Fundrise, warns that sellers may experience low interest and may be forced to write down the value of their assets.