S&P Reignites Fears About Regional Banks’ CRE Exposure

Just when the market’s nervousness over New York Community Bancorp has started to die down, S&P Global Ratings lowered its outlook on five lenders to negative from stable, citing their exposure to the commercial real estate sector. At the same time, it affirmed its ratings on these five banks, “reflecting some mitigating factors, including solid underwriting track records and limited deterioration in asset quality.”

The five are First Commonwealth Financial, M&T Bank, Synovus Financial, Trustmark and Valley National Bancorp, which have “some of the highest exposures” to commercial real estate loans among the banks it rates, the rating agency said.

CRE loans made up between roughly 25% and 55% of the loans of each these banks at year-end 2023, and well exceeded their Tier 1 capital, in some cases by several multiples, it said, also noting that most of these banks have higher-than-peer exposures to loans on office properties as well as sizable multifamily or construction exposures, which could be affected by the price pressures that higher interest rates have put on many property types.

S&P held out a carrot to worried market observers, saying that should the Federal Reserve start cutting interest rates, that could “alleviate some of the cumulative stress in the commercial real estate sector.”  At its latest FOMC meeting, the Fed Chair Jerome Powell reaffirmed that the Central Bank plans to make three rate cuts this year.

But it also noted that while most rated banks haven’t reported a sharp rise in delinquent and nonaccrual CRE loans, “increases in criticized and modified loans and increasing loan maturities may foreshadow an eventual material deterioration in asset quality and performance.”

With these most recent downgrades, nine US banks have a negative outlook, or 18% of those that S&P rates, most of which “relate, at least in part to sizable CRE exposures”.