Rising CRE Loan Delinquencies Aren’t Worrying Banks Yet

Concerns that banks could be overwhelmed by CRE loan defaults could be largely unnecessary, according to what S&P Global Market Intelligence is hearing from banks.

“Concerns about future defaults center on office buildings, which have been affected by home working trends. Some banks moved their loss coverage ratios for office loans into the high-single-digit percentages. PNC Financial Services Group Inc., for example, said its 7.4% allowance means it is ‘reserved for whatever happens,’” the firm wrote.

Between 2017 and 2019, the average portion of total CRE loans that were delinquent was 0.57%, according to S&P Global. At the peak of the pandemic, in the fourth quarter of 2020, it was 1.02%.

The rate has risen from 0.77% in the first quarter of 2023 to 0.82% in the second quarter. In the July 2023 Senior Loan Officer Opinion Survey conducted by the Federal Reserve, “87.9% said standards are tighter than long-term averages and 51.7% said they expect to tighten further over the second half of 2023,” the firm quoted.

“The good news is we’re working with our sponsors,” Clark Starnes, vice chair and chief risk officer of Truist Financial Corporation, said in a July 2023 earnings call, according to an Insider Monkey transcript. “We don’t see our clients in any way just walking away from the loans. We have long-term relationships there. And so, we’re looking at things like asking them to refit, bring in more equity, give us an LC, bring us some interest reserves. We may do some AB note splits while as they attempt to sell the property. So, we’ve got a lot of tools in the tool chest and we’re working all of those. Our goal is to be early on this and work with as many borrowers as we can. And hopefully, the market will improve and will have good success.”

CFO Mike McGuire said, “While problem loans have increased in recent months, we believe overall issues will be manageable in light of our laddered maturity profile, conservative LTVs, and reserves which for office totaled 6.2% of loans held for investment.”

Another example that S&P Global mentioned was PNC Financial Services Group, which has a 7.4% allowance “reserved for whatever happens.”

“Banks including Capital One Financial Corp. and Synovus Financial Corp. moved to cut exposure through portfolio sales, though such transactions are being held up over uncertainty about pricing,” the firm wrote.

PacWest, whose stability had been of concern, sold off its loans portfolios and was acquired by Banc of California in July.

There have also been reduced CRE transaction volumes, as GlobeSt.com has reported, and that by its nature lowers the number of additional loans that would otherwise have come about.

Not all banks may be safe, but it does seem that many have taken precautions in advance.