Breaking down banks’ exposure to troubled commercial property market (NYSE:NYCB)

U.S. banks, particularly the smaller ones, have been in the spotlight over the last year given their outsized loan exposure to the $20T commercial real estate market, which has been confronted with twin hurdles of financing challenges exacerbated by elevated interest rates and diminished office occupancy driven by the widespread shift to remote work.

As of Q3 2023, most CRE loans outstanding (56.1%) were held by small banks with less than $20B in assets, UBS pointed out in a note to clients last month. By comparison, the big banks, with an asset base of more than $250B, held 22% of such debt. This implies that “the greatest risk lies with these smaller ‘community’ banks and therefore CRE is not a risk to the overall banking system.”

Banks’ CRE exposure claimed center stage again after commercial property lender New York Community Bancorp (NYSE:NYCB) disclosed in January a surprise quarterly loss and a huge charge against potential loan losses. Though an investor group led by former Treasury Secretary Steven Mnuchin recently stepped in to offer a $1B lifeline, concerns remain over the bank’s ties to CRE.

Earlier this month, the International Monetary Fund warned in a global financial stability note that the large presence of CRE exposures poses “a serious risk to small and large banks amid economic uncertainty and higher interest rates, potentially declining property values, and asset quality deterioration.

In Q4 2023, “a subset of banks remained with exceptionally high CRE concentration for which losses could compromise their safety and soundness… The turmoil also serves as a stark reminder of the impact that rapidly rising interest rates can have by interacting with underlying financial vulnerabilities,” the IMF added.

Below is a breakdown of the lenders with the greatest concentration of CRE loans as of Q3 2023. The banks’ CRE share of total loans accounts for non-owner occupied nonfarm/nonresidential, multifamily, construction & land development and unsecured CRE.

1. Bank OZK (NASDAQ:OZK): CRE share of total loans – 68.6%; total CRE loans – $17.4B; total assets $32.8B.
2. Home BancShares (NYSE:HOMB): 63.0%; $9.0B; $22.0B
3. Pacific Premier Bancorp (NASDAQ:PPBI): 63.0%; $8.4B; $20.3B
4. International Bancshares Corp. (NASDAQ:IBOC): 59.3%; $4.7B; $14.9B
5. New York Community Bancorp (NYCB): 57.0%; $49.0B; $111.2B
6. Independent Bank Group (NASDAQ:IBTX): 56.1%; $8.0B; $18.5B
7. Valley National Bancorp (NASDAQ:VLY): 54.9%; $27.5B; $61.2B
8. CVB Financial Corp. (NASDAQ:CVBF): 50.2%; $4.5B; $15.9B
9. Independent Bank Corp (NASDAQ:INDB): 48.9%; $7.0B; $19.4B
10. Axos Financial (NYSE:AX): 48.6%; $8.3B; $20.8B
11. Simmons First National Corp. (NASDAQ:SFNC): 48.2%; $8.1B; $27.6B
12. United Bankshares (NASDAQ:UBSI): 46.2%; $9.8B; $29.2B
13. WaFd (NASDAQ:WAFD): 45.9%; $8.1B; $22.5B
14. ServisFirst Bancshares (NYSE:SFBS): 44.9%; $5.2B; $16.0B
15. WesBanco (NASDAQ:WSBC): 43.4%; $4.9B; $17.3B
16. Banner Corp. (NASDAQ:BANR): 42.9%; $4.6B; $15.5B
17. TowneBank (NASDAQ:TOWN): 42.6%; $4.8B; $16.7B
18. Renasant Corp. (NYSE:RNST): 42.4%; $5.3B; $17.2B
19. FB Financial Corp. (NYSE:FBK): 42.3%; $4.0B; $12.5B
20. Glacier Bancorp (NYSE:GBCI): 42.0%; $6.8B; $28.1B

The worst is starting to fade into the past

Indeed, beaten-down CRE prices are starting to rebound after peaking in the beginning of 2022. Even office prices, which especially have suffered from record vacancies spurred by the shift to remote work during the pandemic, appear to be stabilizing at -15% Y/Y in January 2024, noted Apollo Chief Economist Torsten Slok. National, apartment and retail CRE prices are recovering at a faster clip, but remain down some 5%-10% from a year ago. Industrial is the top dog, with prices up slightly Y/Y.

“This is helpful for the regional banks and for the broader economic recovery,” Slok said in a note.

Some Wall Street heavyweights, including Goldman Sachs (GS) Asset Management, see now as the time to jump back into the U.S. property market.

“We don’t think it’s going to be a very sharp V-shaped recovery — we think we’re going to bump along the bottom for a while as a lot of these over-levered situations in the asset class get worked through,” Jim Garman, head of Goldman Sachs Asset Management’s real estate unit told Reuters in a recent interview.