Banks’ High Volatility CRE Loans Spike in Q2

Although U.S. banks are increasing their activity for volatile commercial real estate loans, their overall exposure to these funds remains below recent highs. According to a new report from S&P Global, banks reported a double-digit increase in the aggregate balance of high-volatility commercial real estate (HVCRE) loans in the second quarter, rebounding from a four-year low in the first quarter of 2024.

HVCRE loans are credit facilities primarily used to finance or refinance the acquisition, development, or construction of properties. They are typically employed to fund projects that aim to turn properties into income-producing assets, relying on future income, sales, or refinancing for repayment.

These loans do not include financing for one-to-four-family residential properties, community development projects, agricultural land, or existing income-producing properties secured by permanent financing. Additionally, they exclude real estate loans made before January 2015.

The balance of HVCRE loans rose 20% quarter-over-quarter to $34.9 billion in the three months through June. However, the total balance remains 5% lower than in the same period of 2023.

Data from S&P Global Market Intelligence shows that the aggregate balance of HVCRE loans has been largely declining since the second quarter of 2021 when lenders held $43.7 billion in these loans.

Goldman Sachs, with $2.09 billion in HVCRE at the end of June, and Houston-based Prosperity Bancshares remain the largest HVCRE lenders in the country. The balance of these loans accounted for less than 0.3% and 7.7% of their risk-weighted assets, respectively.

The ratio of HVCRE loans to risk-weighted assets, which reflects a bank’s exposure to higher-risk real estate loans relative to its overall risk profile, is used by professionals to assess the risk profile of financial institutions. A higher ratio indicates that a larger portion of the bank’s assets are tied up in volatile property loans, which could affect capital requirements and increase vulnerability to market fluctuations in real estate.

Meanwhile, Georgia-based Morris Bank and Indiana-based Bank of Commerce held the highest proportion of HVCRE loans relative to risk-weighted assets, at 19.9% and 13.6%, respectively. Morris Bank, with $1.4 billion in total assets, held $265.3 million in HVCRE loans, while Bank of Commerce, with $2 billion in assets, reported $240.5 million in these high-volatility property loans.

HVCRE loans tend to carry higher costs for borrowers due to their risk profile, and rising interest rates can further amplify these expenses, making it more challenging for developers to finance new projects. As many of these loans approach maturity, borrowers may face refinancing risks, particularly if rates remain elevated or market conditions tighten.