Bank CRE Loan Modifications Keep Climbing
According to a recent report from Moody’s Ratings, banks have continued making loan modifications into the third quarter of 2024. Over the past nine months, the median percentage of commercial real estate (CRE) loans to non-owner-occupied (NOO) borrowers—measured by the number of loans rather than the total dollar value—rose by 65 basis points for total NOO CRE loans.
The Federal Reserve’s recent rate cuts have provided “little opportunity for refinancing at reduced rates,” making it likely that loan extensions will continue to help prevent loans from becoming delinquent and avoid banks having to write them down, as noted by Moody’s.
Stephen Lynch, vice president and senior credit officer at Moody’s, shared with GlobeSt.com that the firm examined data from around 65 rated banks in the first round of the report, but only 39 banks disclosed relevant information. The banks did not typically report the exact number of loans modified. When disclosed, it was often a small number of loans modified, as noted by Lynch.
Moody’s reviewed financial reports for U.S. banks with more than $100 billion in assets, along with any banks that had a notable level of CRE relative to their tangible common equity. The data covered the first nine months of 2024, through September 30.
The report showed a 35% increase in the median percentage of loans modified from 48 basis points in the first half of 2024 to 65 basis points over the first nine months. This was a smaller jump than the previous year, when the change from six months to nine months saw a 50% increase, from 18 basis points to 36 basis points.
Banks with more than $100 billion in assets showed some notable differences in loan modification trends. Those with assets between $100 billion and $700 billion, and those with less than $100 billion, experienced varying results. The middle group, with assets ranging from $100 billion to $700 billion, had a 61% increase, rising from 120 basis points to 193 basis points. The largest banks saw a smaller increase of 14%, from 69 to 79 basis points. Meanwhile, the smallest banks experienced the largest percentage increase—217%—from 10 to 32 basis points.
While the sharp rise in loan modifications among the smallest banks might raise concerns, they also had the smallest share of modified loans. In contrast, the largest banks had the smallest increase in loan modifications and the smallest overall percentage of modifications, possibly due to the larger size of their loans. The middle-sized banks, however, had the largest share of loan modifications at 193 basis points and the second-largest percentage increase.
Lynch emphasized that these trends are important to monitor alongside other key factors, such as capital, profitability, asset quality, funding, and liquidity, which are also critical to assessing the health of banks.
Source: GlobeSt.
