Moody’s Places Six Banks on Review for CRE Loan Concentration

Moody’s has long-term ratings and assessments of multiple banks on review for credit downgrades. Below are the banks:

• First Merchants Corporation
• F.N.B. Corporation
• Fulton Financial Corporation
• Old National Bancorp
• Peapack-Gladstone Financial Corporation
• WaFd, Inc.

And here is the reasoning reproduced in each of the Moody’s announcements although there can be additional specific information for a particular institution: “[The bank’s] ratings have been placed on review for downgrade because, as a regional bank with a substantial concentration in commercial real estate (CRE) loans, it faces ongoing asset quality and profitability pressures as higher-for-longer interest rates heighten the longstanding risks of CRE for banks’ creditworthiness, especially during cycle downturns.”

This explanation is different from the closures by the Federal Deposit Insurance Corporation of Silicon Valley Bank, Signature Bank, and First Republic Bank over concerns about solvency and liquidity. In those cases, the banks heavily invested in long-term bonds like Treasurys or mortgage-backed securities, but at times when interest rates were near zero. Nothing wrong with that except the banks gave them accounting treatments of hold-to-maturity, meaning the instruments could retain their face valuation so long as they weren’t sold earlier. However, their market value dropped precipitously when the Federal Reserve raised interest rates to fight inflation. The value of the banks’ major assets dropped, and depositors quickly took out their funds through electronic transfers, raising the question of whether there would be enough liquid assets to redeem ongoing withdrawals.

In this case, Moody’s concern is over the valuations of CRE loans and the ultimate ability of the borrowers to refinance their properties or add enough equity to settle their debts.

There have been increasing signs of banks being overly exposed to CRE loans. A recent analysis of a Florida Atlantic University finance expert said there are 67 banks in the US that are at increased risk of failure due to their commercial real estate exposures.

The concern has often been on regional and small banks as they have had higher direct concentrations of CRE loan exposure. However, larger banks aren’t necessarily safe. A recent study from researchers at the NYU Stern School of Business; Georgia Institute of Technology – Scheller College of Business; and Frankfurt School of Finance, CEPR argued that banks face additional risk. Extensions of credit lines to nonbank financial intermediaries (NBFIs), with REITs being a prime example, provide the potential for extensive backchannel exposure. Additionally, they say that this less obvious relationship means larger banks face more risk from CRE than is generally assumed.

An example has been SREIT, which hadn’t tapped its $1.55 billion credit line before 2023. Since then, it has drawn $1.3 billion.