New Data Indicates Greater CRE Loan Risk for Large Banks Compared to Smaller Lenders
Contrary to the common belief that commercial real estate (CRE) issues primarily affect smaller or regional banks, current data suggests that major banks are experiencing more significant stress.
Loan Exposure
While smaller banks do hold a substantial portion of CRE and multifamily property debt in the U.S., the top 25 largest banks are showing higher rates of loan delinquencies. The performance of CRE loans varies based on factors such as loan purpose and property type.
Delinquency Disparities
According to S&P Global Market Intelligence, banks with over $100 billion in assets have higher delinquency rates for loans on properties intended for leasing (non-owner-occupied). In the first quarter, over 4.4% of these loans were either delinquent or in non accrual status, compared to less than 1% for similar loans held by smaller banks and owner-occupied properties.
Interest Rates and Performance
Interest rates significantly impact loan performance. Owner-occupied CRE loans tend to perform well if the business can maintain its payments, according to S&P Global. Conversely, leased properties are more sensitive to rising interest rates. Problems arise when rental income does not cover the increasing loan costs or refinancing becomes difficult.
Geographic Impact
location also affects loan performance. Larger banks, while not the sole lenders for downtown properties, face more immediate loan maturities. Data from MSCI Real Assets shows that national banks held 29% of maturing office debt last year and 20% this year, compared to 16% and 13% for regional banks, respectively. With balloon payments being common, banks with nearer maturities must carefully evaluate repayment risks.
The Takeaway
The rising challenges for big banks in the CRE sector are evident, with a 1.1% net charge-off rate for non-owner-occupied CRE loans in the first quarter, a full percentage point higher than that of smaller banks. Should the property market downturn worsen, smaller banks might eventually bear more of the burden. However, if high interest rates persist amid a stable economy, these smaller banks could uncover hidden value in their portfolios.