M&T: 20% of Bank's Office CMBS Loans in Danger of Default

M&T Banks says it is conducting “stress tests” on the debt-service ratio of CMBS loans that make up its $5B office portfolio, disclosing that 20% of its office loans are criticized—banking jargon for in distress, potentially in default.

“We’re going through all of the office portfolios and stressing both the vacancy rates and lease rates to see what the debt service coverage ratio is. We’re making sure that we’ve got adequate coverage,” said Darren King, M&T’s CFO, according to a transcript of the Buffalo-based bank’s Q4 earnings call.

“If we talk about our expectations for charge-offs as we go into this year, that’s the place where we’d have the most concern,” the CFO said, referring to office loans that may be written off as losses when the bank believes it can’t collect on the debt.

M&T’s office portfolio, which comprises about 10% of its $46B in CRE loan holdings, is concentrated in the Northeast, with about a sixth of the office buildings located in New York City.

King indicated the office loans showing signs of distress—most of the delinquencies are the result of higher financing costs as loans come due—are spread across the portfolio. The 20% estimate of criticized loans was made at the end of last year. “We’re watching lease expirations and lease sign-ups,” King said.

In disclosing the bank’s stress test on its office assets, King emphasized that “the vast majority” of M&T’s CRE portfolio has loan maturities that don’t come due before 2024 or later.

During the bank’s Q4 earnings call, King also indicated that some of M&T’s loans for senior living facilities, specifically assisted living and senior housing, are showing signs of distress.

“It’s not from lack of demand—it’s their ability to staff,” King said. “We’ve seen occupancy rates in these portfolios come up post-pandemic, but they’re not able to get all the way back to pre-pandemic levels because there’s not enough staff to adequately care for the folks that want to live there.”

The M&T CFO said the picture is much brighter in the hotel sector thanks to the rebound in travel. “We [saw] hotel criticized balances peak about two or three quarters ago. It got as high as about 86% of our hotel portfolio, now it’s down below 50%,” King said.

M&T reported a 3% rise in the fourth quarter of loans that were more than 90 says post due, increasing the total to $491M from the third quarter and marking an abrupt turnaround from the bank’s success during 2022 of reducing its total delinquencies from a peak of more than $1B in Q2 2021.