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These Banks Are Overexposed To CRE

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Flagstar Bank and Zion Bancorporation are chief among the 67 banks in the US that are at increased risk of failure due to their commercial real estate exposures, according to a data analysis from a finance expert at Florida Atlantic University.

Flagstar Bank reported $113 billion in assets with a total CRE of $51 billion. The bank, however, only had $9.3 billion in total equity, making its total CRE exposure 553% of its total equity.

Similarly, Zion Bancorp had a total CRE of 440% of its total equity; the bank reported $87 billion in assets and total CRE of $26 billion, but only $5.8 billion in total equity.

“These are the two largest banks with excessive exposure to commercial real estate,” said Rebel Cole, professor of Finance in FAU’s College of Business.”Both rely heavily on uninsured deposits, which makes them vulnerable to a bank run similar to what forced regulators to close three large banks during spring 2023. Those bank closures have led to concerns about the stability of the US banking system that persist to today.”

For comparison, the Q1 2024 industry-average benchmark for total CRE exposure was 139% of total equity.

All together there are 67 banks with exposure to commercial real estate greater than 300% of their total equity, as reported in their first quarter 2024 regulatory data.

“This is a very serious development for our banking system as commercial real estate loans are repricing in a high interest-rate environment,” Cole said. “With commercial properties selling at serious discounts in the current market, banks eventually are going to be forced by regulators to write down those exposures.”

FAU measures the risk to exposure from commercial real estate using publicly available data released quarterly from the Federal Financial Institutions Examination Council Central Data Repository. Bank regulators view any ratio over 300% as excess exposure to CRE, which puts the bank at greater risk of failure.

Banks with less than $10 billion in total assets are facing similar risks due to their commercial real estate exposure. Among banks of any size, 1,871 have total CRE exposures greater than 300%, 1,112 have exposures greater than 400%, 551 have exposures greater than 500% and 243 have exposures greater than 600%.

 

Source:  GlobeSt.

 

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Banks Have Another Reason To Scale Back CRE Lending

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The pressure that banks are feeling from CRE loans has become a regular observation by the Federal Reserve, Department of the Treasury, Federal Deposit Insurance Corporation, other regulators, economics, financial analysis, investors … pretty much everyone paying attention.

But there’s an odd twist according to a new analysis by economist and economic policy advisor Miguel Faria e Castro and senior research associate Samuel Jordan-Wood at the Federal Reserve Bank of St. Louis.

“Given the negative outlook on certain segments of CRE, one would expect that more-exposed banks have experienced worse market performances,” the two wrote. “We found that while CRE exposure has not mattered much for bank stock returns since the 2007-09 financial crisis, the correlation became significantly negative in 2023.”

The analysis started with an examination of the relationship between commercial real estate exposure as a share of total assets on one hand and total assets in billions of dollars, on a natural logarithm scale. Something immediately obvious is that the largest banks have a relatively small exposure in CRE loans as they represent 10% or less of their assets. But smaller to medium banks had high exposures, in some cases topping 60%.

They found that those banks with high exposure to CRE loans tended to have “relatively fewer liquid assets on their balance sheets, lower capital ratios (that is, more leverage), a larger share of their liabilities in the form of deposits, and a larger share of their assets in the form of loans.”

They then moved beyond a correlation analysis and used regression to look at the connection between CRE exposure and bank returns.

“From 2007 to 2008, the beta coefficient was statistically significant and negative, implying that banks with higher CRE exposure had lower stock market returns, all other variables equal,” they said. “Since the 2007-09 financial crisis affected not only residential real estate but also CRE, it is natural that more-exposed banks performed worse during that time. Our analysis reveals that while the correlation had been mostly inactive since then, it again became significantly negative in 2023.”

So, it seems to be another way banks are currently feeling negative effects from CRE exposure. Not just in concern over asset values and regulatory pressures, but in actual earnings.

 

Source:  GlobeSt.

 

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