Financial Institutions Face Risks To CRE Asset Quality

S&P Global Ratings, New York, said both banks and non-bank financial institutions face risks from their commercial real estate exposure due to the COVID-19 pandemic’s impact on travel, shopping and office usage.

Cash flows and values of many CRE properties–especially hotels, entertainment venues and certain retail properties–have already declined substantially or will likely decline, S&P Global Ratings noted. The ratings agency released two articles outlining the impact of commercial real estate exposures for U.S. banks and non-bank financial institutions, U.S. Banks Face Long-Term Risks To Their Commercial Real Estate Asset Quality and As The Pandemic Persists, U.S. Nonbank Lenders Will Likely Find Their Commercial Real Estate Assets Challenging.

S&P Global Ratings Credit Analyst Stuart Plesser said he expects pandemic-triggered losses on CRE loans to exceed the roughly 2 percent that banks charged off in 2009 and 2010, excluding construction loans. The firm’s base-case loss expectation is currently 3 percent for banks, about half of the Fed’s 6.3 percent aggregate CRE loss rate for banks in the 2020 stress test’s severely adverse scenario.

“If this turns out to be the case, losses should be manageable for most of the banks we rate, particularly given that at the median their exposure to CRE is less than 20 percent of loans,” Plesser said.

But some banks have more CRE exposure than others. Among the banks S&P Global Ratings studied, 11 had more concentrated loan exposure to CRE (greater than 30 percent). “Banks with higher exposure will likely have a tougher time if the asset class deteriorates further,” S&P said. “In addition, losses could exceed our base case, particularly if the economic rebound stalls or if structural changes within CRE in the aftermath of the pandemic are long-lasting and significant.”

S&P also rated eight U.S. non-bank CRE lenders. “We expect they’ll face elevated asset-quality challenges,” said Credit Analyst Matthew Carroll. “Hotel and retail portfolios should be affected most, but office and multifamily portfolios will feel the impact as well.”