Ratings Agency Seeks Better CRE Lending Disclosures
Better disclosures would allow rating agencies to better assess commercial real estate credit risk in bank loan portfolios, said DBRS Morningstar, Toronto.
“The impact from the global pandemic further intensifies the need for increased disclosures globally, as certain commercial real estate sectors have been more severely affected than others,” said DBRS Vice President Michael McTamney. “For example, shutdowns, travel restrictions and social distancing measures have had an outsized impact in retail and hotels.”
McTamney said DBRS Morningstar would like to see broader participation from banks globally in providing the necessary information “in order to appropriately assess the risks in their commercial real estate loan portfolios.”
The report, Assessing CRE Credit Risk in Bank Loan Portfolios Globally: Better Disclosures Would be Applauded report yesterday, said commercial real estate lending has become more cyclical and volatile than other types of lending, as indicated by several crises in recent decades that sometimes led to bank failures.
“Consistent with historical trends and given the nature of the current coronavirus-driven downturn, we expect banks with high concentrations of commercial real estate will be more vulnerable to the economic fallout than those with more diversified loan portfolios,” the report said.
DBRS Morningstar also noted the inherent risks and loss potential in a commercial real estate portfolio are determined more by loan composition and underwriting standards than by aggregate size, because the various loan types that make up the portfolio have different default probability and loss-given default characteristics.
“Since the financial crisis, commercial real estate loan growth has been substantial, driven in part by the low interest rate environment,” the report said. “Moreover, the composition of banks’ commercial real estate portfolios has generally shifted toward lower risk nonresidential commercial and multifamily loans and away from construction and development.”
To analyze the financial fundamentals of a bank that lends on commercial real estate involves an analysis of both the quantitative components and qualitative characteristics of the portfolio, DBRS Morningstar said.
