Fitch Ratings: Small U.S. Banks Most Exposed to Commercial Real Estate Losses
Fitch Ratings, Chicago, said the U.S. commercial real estate market will likely see deteriorating credit metrics once stimulus measures wind down and forbearance programs expire, with smaller CRE-concentrated banks more susceptible to elevated losses, which are expected to peak below levels seen in the past.
Fitch noted a “very high” correlation historically between U.S. bank failures and exposure to CRE lending. As of 2020, nearly 26% of FDIC-insured institutions had an elevated concentration of CRE loans; however, this remains below the 39% peak during the Great Recession. Since then, banks with assets of less than $100 million have decreased CRE exposure the most relative to size of overall balance sheets.
Conversely, the report said, banks with assets between $10 billion-$250 billion were the only segment to increase exposure to CRE lending to 16% at March 31, from 12% of assets in 2008. The largest U.S. banks continue to have relatively modest exposures to CRE, at about 5% of assets. Within the Fitch-rated U.S. bank universe, only four banks are on Negative Rating Outlook driven by to CRE-related exposures, among other factors.
Fitch said other financial participants, including non-bank financial institutions, account for nearly 13% of the market. Fitch-rated NBFIs with more meaningful exposure to the CRE sector include four mortgage REITs, all on Stable Rating Outlook Stable. Also rated are pensions, traditional investment managers and alternative investment managers with indirect exposure to CRE.
“While we do not anticipate a return to peak levels of CRE, construction and multifamily loan losses…current metrics will likely deteriorate once stimulus measures wind down and forbearance programs expire,” the report said. “When this occurs, we expect smaller CRE-concentrated banks in the U.S. to be more susceptible to elevated losses.”
Fitch noted exposure to commercial mortgage-backed securities is “not meaningful.” However, the report warned of longer-term uncertainties related to certain CRE asset classes, notably office, retail and lodging, “which may lead to deterioration in these sectors over time.”
For office, Fitch noted this uncertainty reflects structural changes as a result of the pandemic, with more businesses adopting hybrid work-from-home and office policies. “With an increase in remote work, this could have more longer-term impacts on office vacancies and rents, as well as business travel and lodging as businesses substitute virtual meetings for in-person meetings,” the report said. “We expect hat this will impact larger cities more than lower-cost smaller markets, due to the reliance on public transportation.”
Nonetheless, Fitch said expectations for a significantly worse credit environment are mitigated by an improving macroeconomic backdrop, “notwithstanding uncertainty around variants and the potential for renewed lockdowns.”
