Moody’s downgraded six US regional banks on Thursday because of their increasing exposure to commercial real estate loans. The downgraded banks are First Merchants Corp, F.N.B. Corp, Fulton Financial Corp, Old National Bancorp, Peapack-Gladstone Financial Corp, and WaFd.
Moody’s Downgrades Six US Regional Banks
Moody’s downgrades six US regional banks because of a high concentration in commercial real estate loans. These loans have been under pressure because of high interest rates, raising risks, especially during economic downturns.
Moody’s noted that before the Federal Reserve’s rate hikes, many regional banks built and maintained large concentrations in the volatile commercial real estate (CRE) sector.
Regional banks with exposure to struggling commercial real estate have faced increased investor scrutiny after New York Community Bancorp’s recent troubles.
Investors Scrutiny
Last week, a sell-off in regional US bank stocks due to New York Community Bancorp highlighted the group’s exposure to commercial real estate (CRE) for analysts and investors. Since early 2023, the industry has faced potential losses on CRE loans due to high interest rates and lower office occupancy from remote work adoption.
Investors fear weak office demand could lead to defaults, pressuring banks and lenders to avoid selling CRE loans at steep discounts. Concerns span the banking sector, with major banks like Wells Fargo increasing reserves and smaller lenders raising loan loss provisions and selling portfolios to private equity firms.
According to the IMF’s April Global Financial Stability Report, the percentage of non-performing CRE loans in US banks’ portfolios doubled to 0.81% by the end of 2023.
Due to ongoing pressure in the sector, U.S. regional banks are expected to increase reserves for potential CRE losses and sell more property loans. When New York Community Bank posted a surprise fourth-quarter loss, it heightened concerns about the industry’s CRE exposure, particularly in multifamily properties with more than five units.
Scrutiny of regional banks has increased since Silicon Valley Bank’s collapse, driven by high borrowing costs and low-rate loan income following the Fed’s rate hikes in March 2022. Many banks have unrealized losses on securities portfolios, including mortgage-backed securities. Several regional banks will report first-quarter earnings starting April 16. Stephen Buschbom, research director at Trepp, said he expected to see more reserve buildup.
Buschbom added that office loans are a major concern for banks due to ongoing remote work. This has led to vacancies that make it harder for building owners to repay mortgages. He also mentioned stress in the multifamily sector, particularly in cities like New York and San Francisco, where rent hikes were limited before the pandemic due to low interest rates and inflation.
According to the International Monetary Fund’s Global Financial Stability Report, non-performing CRE loans doubled to 0.81% of U.S. banks’ portfolios by the end of 2023 from 0.4% the previous year. The IMF also said that banks have been increasing provisions for bad CRE loans.
Analysts and investors are anticipating higher reserves, with Morgan Stanley forecasting a 10- to 20-basis point increase in CRE reserve ratios for regional banks this year, according to Manan Gosalia, an analyst at the Wall Street bank. Aggregate provisions are currently 20% above consensus, she added.
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