Megabanks not immune to office space slowdown as stressed loan percentage jumps

By Steve Gelsi

FDIC Chairman Martin Gruenberg sees 'downside risk for the industry'

The largest U.S. banks are currently managing the highest percentage of stressed loans in their commercial real-estate portfolios in more than a decade as the industry faces slack demand for office space.

The noncurrent rate for commercial real estate (CRE) loans by banks with assets of $250 billion or more climbed to 4.11%, up about three times from the year-ago rate of 1.3% and ahead of the previous quarter's total of 3.72%, according to the Federal Deposit Insurance Corp.'s quarterly report on banks.

It's the highest total for the big banks since the third quarter of 2012, when it was 4.12% (see chart). The FDIC defines the data as "non-owner occupied, nonfarm nonresidential loan past due and nonaccrual rates."

The percentage of troubled CRE loans for the largest banks is more than double the figures for all four smaller subsets of banks, although it's still only a small part of their overall businesses.

FDIC Chairman Martin Gruenberg said the figures present " a downside risk for the industry" as well as a "high priority" in the supervisory work by federal regulators.

Weak demand for office space is softening property values, and higher interest rates are affecting the credit quality and refinancing ability of office and other types of commercial real-estate loans, he said.

The higher noncurrent rate for non-owner occupied CRE loans was "driven by portfolios at the largest banks," he said.

Bank industry spokespeople from Financial Services Forum and the Bank Policy Institute declined to comment.

To be sure, while the rates of troubled commercial real-estate loans have increased, the largest banks also have much smaller exposure to the sector than regional banks. (See chart)

The largest banks ended the fourth quarter with 5.95% of their total loans in commercial real estate, which not only includes stressed office properties but more desirable luxury retail, data center and light-industrial sectors.

By contrast, smaller banks with assets of $1 billion to $10 billion ended the quarter with 35% of their total loans in commercial real estate. For banks with assets of $100 million to $1 billion, that figure is 28%.

Overall, banks remain healthy with favorable overall asset quality metrics, despite deterioration in commercial real-estate portfolios, Gruenberg said.

"The banking industry has shown resilience after a period of liquidity stress in early 2023," he said. "Full-year net income remained high, overall asset quality metrics were favorable, and the industry's liquidity was stable."

Chris Marinac, analyst with Janney, said the minor overall CRE exposure by the biggest banks is a more important factor to consider when assessing the industry's strength.

"There is indeed deterioration," Marinac said. "The CRE concentration of total loans is actually small at most of these large banks."

Overall, exposure to commercial real estate has been a hot topic in banking.

The mightiest of U.S. banks JPMorgan Chase & Co. (JPM) said it did "a little bit of a deep dive" on its $120 billion multifamily-loan portfolio and came away satisfied with its overall health, CFO Jeremy Barnum said.

Also read: After NY Community Bank's woes, JPMorgan Chase did a 'deep dive' into its own multifamily-loan exposure

New York Community Bancorp (NYCB) disclosed Thursday it sold consumer loans valued at $899 million in latest move to bolster its finances.

The bank's steep slide in stock price this year followed its disclosure of loan losses on one multifamily property as well as an office loan.

Also read: New York Community Bancorp's stock crushed on surprise loss, dividend cut and cost of two loans

Also read: NYCB led increase in loan-loss reserves by big regional banks as lenders brace for potential downturn

Ran Eliasaf, founder and managing partner of private real-estate investment firm Northwind Group, said the diversification of the largest banks are protecting them against CRE exposure, but smaller institutions continue to struggle because of lower values of office real estate, which in turn pulls down loan value.

"The drama is happening with regional and smaller banks," Eliasaf said. "We see many banks and mortgage real-estate investment trusts [REITs] that have a lot of stressed loans."

Eliasaf does not expect a replay of the Global Financial Crisis because the biggest banks remains in sound shape, but there will be winners and losers in the upheaval, he said.

Robert Riva, a partner at Cole Schotz in New York City, said no one expects commercial real estate to recover any time soon.

"Pressures are mounting" in the sector with banks facing billions in commercial real-estate loans due this year, Riva said.

"You'll see a lot of stress bringing down a lot of banks," he said. "Right now we're handling a lot of refinancing and loan extensions....You have a lot of banks that are overly invested in a sector that's just having a lot of trouble right now."

Also read: NYCB still faces big challenges after $1 billion cash injection

Also read: NYCB sells consumer loans valued at $899 million in latest move to bolster finances

-Steve Gelsi

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03-15-24 0956ET

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