Banks' real estate lending has become a growing concern for investors since the problems at New York Community Bancorp Inc. came to light in late January and sent community bank stocks plummeting.
NYCB's sharp increase in loan loss reserves has caused its stock price to fall 70%. Other banks that make commercial real estate loans in the New York area have also seen their shares fall, but less dramatically. New Jersey-based Valley National Bank's shares have fallen 25% since January, even though the bank says its borrowers are not owners of rent-regulated apartments on NYCB's loan books.
The banking worries prompted analysts at Evercore ISI to examine the commercial real estate exposure of the regional financial institutions they track.
John Pancari and his colleagues said charge-offs are well below the levels seen between 2008 and 2012. But further deterioration in the real estate sector could require additional loan loss reserves for some banks with above-average real estate loans. These banks include Karen Frost Bankers, Synovus Financial, M&T Bank and Citizens Financial Group.
Pancali told Barron's that he doesn't think commercial real estate loans will trigger the failure of larger regional banks. “This is a bank earnings issue, not a liquidity or capital issue,” he said.
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Barron's contacted the four banks about the report but none were available for comment.
The Evercore team mapped banks' real estate concentrations and loan loss reserve levels. Texas-based Karen Frost was rated the riskiest on Evercore's rankings, with 35% of its loans in commercial real estate. Frost has concerns about 17% of its commercial real estate loans, and has booked loan loss reserves that amount to 1.45% of its portfolio, according to Evercore.
When Frost reported its year-end results in January, it told investors that its non-owner-occupied commercial real estate portfolio was performing well. Property prices still provided a cushion, and loans averaged 53% of property values. Property cash flow was 1.44 times the cost of debt. For office properties, these loan characteristics were even better.
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Georgia-based Synovus is the next highest on Pacari's heat map. About 32% of the bank's loans are in commercial real estate, and those loans amount to 227% of the bank's regulatory capital, according to Evercore. Its reserves were 1.09% of its real estate loans.
At a conference a few weeks ago, Synovus CEO Kevin Blair told investors he felt good about the bank's commercial real estate portfolio. He acknowledged that new lending activity has been very slow, but said troubled loans, whether for office or apartment properties, are few. The bank has plenty of capital reserves, he said.
Coming in third highest on Evercore's heat map is Citizens Financial Group. The Rhode Island-based bank has commercial real estate making up 19% of its loans. Its loan loss reserves were 2.2% of its loans. Its reserves for office loans were much higher, at 10.2%.
One way Pancari evaluates reserves is to compare them to losses estimated in Federal Reserve stress-test simulations. Citizens' reserves for mortgages were 18% of hypothetical losses in the Fed's scenario for a severe recession. Pancari said the average reserves for all regional banks were 25% of stress-test losses. For large banks like Wells Fargo,
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The average was 28%.
Citizens Chief Executive Bruce Winfield Van Saun said on the bank's January earnings call that the bank has adequately controlled its office loans, adding that losses on apartment loans have been very small. The bank has little exposure to rent-regulated buildings.
Coming in fourth on Evercore's real estate heat map is Buffalo, New York-based M&T Bank, with commercial real estate loans making up 24% of its loan balance and reserves making up 1.9% of its loans. In a stress-test scenario, these reserves would account for 22% of the bank's losses, analysts say.
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In a shareholder letter last week, M&T noted that it has reduced its commercial real estate loan concentration to its lowest level in 15 years, with loan-to-real estate value ratios averaging 56%.
“We're very comfortable with where our reserves are today,” Chief Financial Officer Darryl Bible told investors during M&T's last earnings call. “I can't promise you that reserves won't go up going forward, but we've done a thorough review of what's going to happen with our higher-risk credit types going forward.” [commercial real estate] space.”
Pancari told Barron's that the banks' real estate loans are unlikely to be a concern for depositors, “but it's worth keeping in the forefront of your mind because it could impact stock prices,” he said.
Corrections and additions
Synovus Financial's commercial real estate loans stood at 227% of regulatory capital as of the end of December. An earlier version of this article incorrectly said loans were more than 300% of capital.
Contact Bill Alpert at william.alpert@barrons.com.