Commercial property loans from overexposed US regional banks may be sold

Regional banks in the US that have too much risk could sell industrial property loans

According to new data and market sources, many regional U.S. lenders may have to think about selling off commercial real estate (CRE) loans at a steep discount because they have crossed key regulatory limits for exposure to the troubled sector.

Regional banks, which are the biggest lenders to the struggling U.S. CRE and construction markets, have cut their exposure to the sector by tightening their standards and making fewer loans, especially in the weeks after Silicon Valley Bank, Signature Bank, and First Republic Bank went bankrupt.

Their rules are getting stricter because many real estate users are having trouble making their interest payments in a time when interest rates are going up and office use is going down and property values are going down because people are worried about a recession.

Still, new data from New York-based real estate data provider Trepp, which was shared with Reuters, shows that many area banks' holdings are bigger than what regulators allow.

The Federal Deposit Insurance Corporation and other officials said in 2006 that banks with CRE or construction loan holdings that are more than 300% and 100% of their total capital, respectively, should expect to be looked at more closely by the government.

Trepp looked at the public regulatory data for 4,760 banks and found that 763 of them have either a CRE loan concentration ratio or a construction loan concentration ratio that is higher than these limits.

About 30% of banks with assets between $1 billion and $10 billion went over at least one measure, while 23% of banks with assets between $10 billion and $50 billion did the same.

Even though big banks have been warning about CRE exposure lately, the new Trepp data shows how serious and widespread the problem is in the banking industry as a whole.

HESITANCY TO LEND

Stephen Buschbom, who is in charge of research at Trepp, said, "If you are exceeding those concentration ratios today, there is probably going to be a lot of hesitancy to continue lending." This is because of worries about commercial real estate.

"Once you go over that threshold and have made a lot of risky loans, it could be a problem for the bank's liquidity and credit," he said.

The regulatory guidance says that banks that have more than these limits "should use stronger risk management practises," which could include selling certain loans.

Trepp data shows that PacWest (PACW.O), which said on May 3 that it was thinking about selling, went over both the CRE and construction loan limits in the first quarter, at 328% and 126%, respectively.

Also, New York Community Bancorp (NYCB.N) and Flagstar Bank [RIC:RIC:FBCANK.UL] were two of the top five banks on Trepp's list of those that had more CRE loans than they could handle. Even though the banks joined together in December, they still report their earnings separately.

Other banks that exceeded one or both rates include Valley National Bancorp (VLY.O), East West Bank [RIC:RIC:EWBCW.UL], Synovus Bank [RIC:RIC:SNVSYN.UL], Western Alliance Bank [RIC:RIC:WALACE.UL], CIBC Bancorp USA (MTB.N), and M&T Bank.

Western Alliance and Valley National both said they didn't want to talk, and the other lenders didn't respond to calls for comments.

Martin Gruenberg, the head of the FDIC, told Congress on Tuesday that CRE loan portfolios "face challenges" if the market stays the same.

Banks that are vulnerable may cut back on loans so that their CRE debt can roll off. According to the rules and analysts, they could even sell parts or all of their current loan books if things got really bad.

"All of these renters are taking up less space in buildings, which makes more space available and puts pressure on rents to go down. Mike Brotschol, managing director and co-head of KBRA Credit Profile, said, "Right now, office properties are in the middle of a perfect storm."

In a March report, JPMorgan (JPM.N) said that it expected about 21% of outstanding office loans in commercial mortgage-backed securities to go bad.

Ben Miller, co-founder and CEO of the alternative investment site Fundrise, says that sellers may not get much interest and may have to take a loss on the assets.

Miller said, "Banks are going to get terrible prices."