Moody’s continues to have longer term concerns about banks with outsized CRE concentrations
But despite elevated losses from commercial real estate loans, Moody’s does not expect to make system-wide rating downgrades.
Moody’s estimates that rated U.S. banks hold 50% of total CRE loans and will incur CRE losses of $120 billion from 2008 through 2011. This sum represents a loss rate of approximately 17% on the banks’ year-end 2007 CRE loan balances. For both rated and unrated banks, total remaining losses on CRE lending may well exceed $150 billion.
“So far, Moody’s rated banks have incurred $43 billion of CRE losses through charge-offs and purchase accounting marks, leaving $77 billion — or close to 65% of our estimate — to be taken in the fourth quarter of 2009 and all of 2010 and 2011,” says the report’s co-author, Assistant Vice President Joseph Pucella. “Based on our forecasts and expectations for the CRE sector, however,” the analyst adds, “we see no need for further system-wide rating downgrades of U.S. banks beyond what we have already done.”
Outside of the rated bank universe, the analyst notes that the CRE problem is a more troubling issue.
A large number of smaller banks, which constitute just 15% of total system assets but carry 50% of all CRE loans outstanding, will likely continue to struggle under the weight of their CRE exposures, and many will collapse.
The cost of these failures will inevitably be borne by the entire banking system, but it is unlikely to be a ratings driver.
Moody’s estimates that high leverage and slack demand will cause property prices to ultimately drop 45% to 55% from their 2007 peak. Mr. Pucella explains: “We have periodically revised our CRE loss assumptions to reflect the worse-than-expected deterioration in the commercial property markets, and we have moved bank ratings down accordingly.”
Beyond U.S. banks’ ability to absorb CRE losses during the near term, Moody’s continues to have longer term concerns about the credit standing of those banks with outsized CRE concentrations. “Such institutions could find themselves with diminished franchises after the recession because CRE lending opportunities and the associated revenue have dried up,” Mr. Pucella points out, “which could then have major implications for the sustainability of their business models.” As a result of these franchise issues, a large CRE concentration could act as a constraining factor on bank ratings.
For details, see U.S. Bank Ratings Incorporate Continued High Commercial Real Estate Losses(Premium)
Earlier this week Standard & Poor’s said The Worst May Still Be Yet To Come For US Banks’ Commercial Real Estate Loans
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