Banks Double Down on CRE Loan Reserves

The closure of Silicon Valley Bank, First Republic Bank, and Signature Bank earlier this year were the embodiment of concern that had been building. Many commercial banks were at risk when assets were found to be wanting and not worth their official value.

Commercial real estate loans held by banks have quickly become the most recent concern. “The tight monetary environment has placed pressure on most CRE properties’ collateral values and transaction volumes while structural changes in demand for office space have adversely impacted occupancy for that asset class,” Fitch Ratings wrote in May. “These factors increase credit risk for banks that have CRE loan concentrations, and are expected to have an impact on asset quality in CRE loan portfolios of U.S. banks.”

While Fitch was primarily focused on banks with less than $100 billion in assets as “more susceptible to deteriorating commercial real estate (CRE) fundamentals than larger banks,” it’s worth looking at where the larger banks stand with real estate exposure. According to a Reuters roundup of second quarter earnings announcements from financial institutions, for many it’s a shaky foundation.

Bank of America

In the most recent earnings call, CFO Alastair Borthwick said the bank saw “$17 million in charge-offs on office exposure to write down a handful of properties where the LTV has deteriorated.” In Q1, the number was $15 million, for a first half year total of $32 million. “Commercial reservable criticized utilized exposure of $21.5B increased $1.7B from 1Q23, driven primarily by Commercial Real Estate,” said a supplementary source.

Citizens Financial Services

Largely due to commercial real estate holding, nonaccrual loans, those without payment for at least 90 days, grew by $195 billion, almost reaching $1.2 billion. Net charge-offs were up $19 million to $152 million. Provision for losses were $176 million in Q2, though that was down from $216 million in Q2 of 2022.

East West Bankcorp

The bank indicated that it was reasonably well protected from real estate fallout. A total CRE loan portfolio size of $19.9 million had a weighted average loan-to-value of 51% and that a “high percentage” of its CRE loans were full recourse with personal guarantees “from individuals or guarantors with substantial net worth.”

Fifth Third Bancorp

Allowance for loan and lease losses in commercial real estate were 1.57%. That was up from 0.09% in the first quarter. Nonperforming loans were at 0.13%, down from 0.29% in Q1.

Goldman Sachs Group

“Equity investments reflected net losses from real estate investments compared with net gains in 2Q22, partially offset by significantly lower net losses from investments in public equities,” the bank wrote. Private losses were $305 million and public, $100 million. However, that was significantly better than the same period in 2022, where the private and public losses were $540 million and $640 million.

JPMorgan Chase & Co.

CRE revenue was up to $806 million, a $164 million increase from the first quarter with its acquisition of First Republic Bank. It did see $1.1 billion in credit loss provisions, mostly from office.

Morgan Stanley

The bank reported credit loss provisions of $97 million, compared to $82 million in the second quarter of 2022, were “primarily driven by credit deteriorations in the commercial real estate sector.”

Webster Financial Corp.

Nonperforming CRE loans were $47.9 million, up from $35.8 million in Q1.

Wells Fargo

“We had a $949 million increase in the allowance for credit losses, primarily for commercial real estate office loans, as well as for higher credit card loan balances,” the bank wrote. “While we haven’t seen significant losses in our office portfolio to-date, we are reserving for the weakness that we expect to play out in that market over time.”