Smaller Banks Face Dangers Once Stimulus Aid Expires

Smaller CRE-concentrated banks are more susceptible to elevated losses from deteriorating credit in the commercial real estate market once stimulus measures wind down and forbearance programs expire, Fitch Ratings warned Tuesday.

“There has been a very high correlation historically between U.S. bank failures and exposure to CRE lending,” Fitch said.

However, the CRE losses are expected to peak below levels seen in the past, mitigated by an improving macroeconomic backdrop, notwithstanding uncertainty around variants and the potential for renewed lockdowns. the ratings service noted.

To protect themselves, Fitch said smaller banks (those with assets of less than $100 million) have decreased CRE exposure the most relative to size of overall balance sheets since the 2008 financial crisis.

At the same time, banks with assets between $10 billion-$250 billion were the only segment of the industry to increase exposure to CRE lending to 16% at March 31, 2021 from 12% of assets in 2008.

Fitch added the largest U.S. banks continue to have relatively modest exposures to CRE, at about 5% of assets.

Generally, the banking industry is in good shape following the pandemic, Timothy Sloan, former CEO of Wells Fargo and special advisor to Fortress Capital, said in a May webinar.

He noted banks have taken a conservative step back from lending activity, largely because of the market uncertainty.

“The combination of good management decisions in the banks themselves and the regulatory changes that were made, meaning that the banking system has two-to-three times the amount of capital and liquidity,” explained Sloan at the event held by Los Angeles-based George Smith Partners.