CHUNYIP WONG/iStock via Getty Images
Small U.S. banks have found themselves under scrutiny recently due to their significant loan exposure to the $20 trillion commercial real estate market. The sector faces challenges with financing exacerbated by high interest rates and reduced office occupancy resulting from the widespread adoption of remote work.
In a recent note to clients, UBS highlighted that as of Q3 2023, small banks with assets under $20 billion held the majority (56.1%) of outstanding commercial real estate (CRE) loans, compared to big banks with over $250 billion in assets holding only 22% of such debt. This has led to concerns about the risk primarily resting with these smaller community banks rather than posing a systemic threat to the larger banking system.
New York Community Bancorp (NYSE:NYCB) made headlines after reporting an unexpected quarterly loss and a significant charge against potential loan losses in January. Although a group of investors led by former Treasury Secretary Steven Mnuchin extended a $1 billion lifeline, questions persist regarding the bank’s connection to the CRE market.
An International Monetary Fund report issued earlier this month raised alarm about the substantial exposure of banks to CRE, highlighting the serious risk posed to both small and large banks amidst economic uncertainty, rising interest rates, potential property value declines, and deteriorating asset quality.
The Top Banks Exposed to CRE Loans
- Bank OZK (NASDAQ:OZK): CRE share of total loans – 68.6%; total CRE loans – $17.4B; total assets $32.8B.
- Home BancShares (NYSE:HOMB): 63.0%; $9.0B; $22.0B
- Pacific Premier Bancorp (NASDAQ:PPBI): 63.0%; $8.4B; $20.3B
- International Bancshares Corp. (NASDAQ:IBOC): 59.3%; $4.7B; $14.9B
- New York Community Bancorp (NYCB): 57.0%; $49.0B; $111.2B
- Independent Bank Group (NASDAQ:IBTX): 56.1%; $8.0B; $18.5B
- Valley National Bancorp (NASDAQ:VLY): 54.9%; $27.5B; $61.2B
- CVB Financial Corp. (NASDAQ:CVBF): 50.2%; $4.5B; $15.9B
- Independent Bank Corp (NASDAQ:INDB): 48.9%; $7.0B; $19.4B
- Axos Financial (NYSE:AX): 48.6%; $8.3B; $20.8B
- Simmons First National Corp. (NASDAQ:SFNC): 48.2%; $8.1B; $27.6B
- United Bankshares (NASDAQ:UBSI): 46.2%; $9.8B; $29.2B
- WaFd (NASDAQ:WAFD): 45.9%; $8.1B; $22.5B
- ServisFirst Bancshares (NYSE:SFBS): 44.9%; $5.2B; $16.0B
- WesBanco (NASDAQ:WSBC): 43.4%; $4.9B; $17.3B
- Banner Corp. (NASDAQ:BANR): 42.9%; $4.6B; $15.5B
- TowneBank (NASDAQ:TOWN): 42.6%; $4.8B; $16.7B
- Renasant Corp. (NYSE:RNST): 42.4%; $5.3B; $17.2B
- FB Financial Corp. (NYSE:FBK): 42.3%; $4.0B; $12.5B
- Glacier Bancorp (NYSE:GBCI): 42.0%; $6.8B; $28.1B
The Future Outlook for the Commercial Real Estate Market
Despite the challenges, there are signs of improvement in the CRE sector with prices beginning to rebound after reaching a peak in early 2022. Office prices, in particular, have shown signs of stabilization with a -15% year-over-year change in January 2024. Other segments such as national, apartment, and retail CRE are recovering faster, although they remain 5%-10% lower than a year ago. Industrial properties have fared the best, with prices slightly up year-over-year.
“This resurgence is positive not only for regional banks but also for the broader economic recovery,” remarked Apollo Chief Economist Torsten Slok.
Noteworthy institutions like Goldman Sachs Asset Management are viewing the current market conditions as an opportunity to re-enter the U.S. property market confidently.
“We anticipate a more gradual recovery rather than a rapid bounce back as we navigate through the challenges posed by over-leveraged assets in the class,” shared Jim Garman, head of Goldman Sachs Asset Management’s real estate division, in a recent interview with Reuters.
