Commercial Loan Losses Cast Shadow Over Regional Banks
Excerpted from Rising Commercial Loan Losses Cast A Long Shadow Over U.S. Banks
Despite some hopeful signs of relief for U.S. banks in second-quarter 2009, the next several quarters likely will continue to be a struggle, especially for small regional institutions, Standard & Poor’s Ratings Services analysts said during a quarterly conference call on Aug. 6. Overall, the industry outlook remains predominantly negative, in part because of banks’ lower profit margins related to still-heavy provisioning required for increased reserve building. Asset-quality deterioration shifted to commercial lending, both commercial and industrial and commercial real estate (CRE), from consumer-related loans.
During the next few quarters we will see a sharp acceleration of weakening on the commercial side – Scott Sprinzen, Standard & Poor’s credit analyst.
In particular, weakness in the U.S. economy could hurt vacancy rates for CRE further, more specifically for retail and office properties, and the drop in asset prices could make refinancing difficult.
The fundamentals for some of the [commercial] asset classes are deteriorating very quickly- Standard & Poor’s credit analyst Tanya Azarchs.
Declines in early-stage delinquencies, which occurred across multiple consumer asset classes in May and June, however, are feeding hopes that credit losses for those exposures could stabilize. Although this drop could be merely a seasonal phenomenon because delinquencies typically dip in June, Ms. Azarchs said, it was more pronounced this year.
Few banks escaped the downturn in consumer-related assets, however. Some institutions, such as SunTrust Banks Inc. (NYSE: STI) and Fifth Third Bancorp (NYSE: FITB) are already at or above the stress level for mortgage losses, based on the government’s stress test expected loss rate over two years (8.8%). “Others are quite a bit shy of it, but you could see them getting there,” Ms. Azarchs said. Auto loan net charge-offs have stabilized, but credit-card loss rates were well in excess of the last historical peak in 1997. With about a 10% charge-off rate, credit card losses nearly meet our stress-test expectations, and are just below the government’s 11.3% stress level.
The credit downturn has just started to give banks a taste of the decline in commercial-related assets. “We’re still early in the cycle of CRE losses,” said Ms. Azarchs, who expects declines in performance to match or exceed those from the last peak in 1991. About a quarter of the loan portfolios in Standard & Poor’s rated banking universe overall consist of CRE loans.
Regional institutions, because of their high concentrated CRE and geographic exposure, will likely be the hardest hit from this latest phase of the credit downturn.
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