S&P issues negative outlook on five U.S. regional banks due to risky office space exposure

By Steve Gelsi

Higher vacancies trigger rise in criticized and modified loans, as a maturity wall looms

S&P Global has issued a negative outlook on five U.S. regional banks facing an increased challenge from higher office vacancies as well as an increasing number of loan maturities on the horizon.

First Commonwealth Financial Corp. (FCF), M&T Bank Corp., (MTB), Synovus Financial Corp. (SNV), Trustmark Corp. (TRMK) and Valley National Bancorp (VLY) were downgraded to a negative outlook, from stable.

"Increases in criticized and modified loans and increasing loan maturities may foreshadow an eventual material deterioration in asset quality and performance," S&P analyst Brendan Browne said in a research note.

On the plus side for the banks, however, most haven't reported a sharp rise in delinquent and nonaccrual commercial real estate loans.

A check of bond prices by M&T Bank, Synovus and Valley National shows that Valley National has seen a drop in the value of its bonds in 2024 as its large exposure to rent-regulated multifamily loans has weighed on its debt, along with its office space exposure. (See chart below.)

Valley National's bond prices have fallen amid jitters in the banking sector around the lower value of multifamily real estate in New York City tied to New York Community Bancorp (NYCB).

Valley National built up its loan loss reserves by 130% in the fourth quarter, as it prepared for potential stress in its loan portfolio or other challenges

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

Meanwhile, bond prices of M&T Bank and Synovus have remained strong in 2024.

S&P did not cut any ratings on the specific bonds issued by the banks, which still offer "solid underwriting track records" as well as limited deterioration in asset quality.

Most of the five banks with revised negative outlooks currently manage more office property loans as a total percentage of their portfolio compared to their peers.

Commercial real estate loans make up between about 25% and 55% of the loans at each of the five banks as of the end of 2023, S&P noted.

S&P reiterated BBB- issuer credit ratings for First Commonwealth Financial, Synovus and Valley National.

The rating of BBB- is the lowest rating for investment-grade debt.

S&P stuck to a BBB issuer credit rating for Trustmark and a BBB+ issuer credit rating for M&T Bank.

Including the five debt outlook downgrades on Tuesday by S&P, the debt rating firm now has nine U.S. banks with negative outlooks, for a total of about 18% of U.S. banks that it covers.

In 2023, S&P cut its ratings outlook to negative for Columbia Banking System (COLB) and S&T Bancorp (STBA).

Also read: Regional-bank bondholders seem unworried by New York Community Bank's problems

-Steve Gelsi

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03-27-24 1044ET

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