Suntrust Mortgage Rate
Richard Trincellito – Banking's Next Level
Regional banks can no longer ignore the elephant in the room – their exposure to commercial real estate bust.
Although the housing market remains weak, analysts expect credit problems over the next year to focus on commercial real estate – Mortgages on office and residential buildings and shopping centers and the construction, development and industrial loans.
U.S. banks hold about $ 1.8 trillion worth of commercial loans, according to Federal Reserve data. Store regional banks, including PNC (PNC, Fortune 500) of Pittsburgh, KeyCorp (KEY, Fortune 500) of Cleveland and BB & T (BBT, Fortune 500) of Richmond, Virginia, has more than half of their loan books in commercial loans.
With financing markets locked up and the economy remains stuck in recession – unemployment is at a 26-year high, while capacity utilization, an important indicator of industrial production, which recently hit a record low – Observers fear a wave of loans will go bad in the coming quarters.
"The problems of commercial real estate is serious and will probably take many years to solve," Deutsche Bank analyst Richard Parkus told the Joint Economic Committee of Congress this month. He said the biggest losses are expected to come from banks 550 billion dollars of construction loans, as loans to developers.
Banks are already braced for impact. Higher borrowing costs led to second quarter losses at banks ranging from Atlanta's SunTrust (STI, Fortune 500) to Delaware's Wilmington Trust (WT). Zion Bancorp (ZION) which operates mainly in Utah, California, Texas and Nevada, was among the forecasts deeper losses on problem commercial mortgage loans.
"It's still a pretty crummy economy out there, and we experienced deterioration in its entirety," Zion Bancorp Chief Financial Officer Doyle Arnold said in a telephone conference with analysts and investors.
Therefore, banks have been adding to their reserves for future credit losses. But with more borrowers falling behind on their loans, it is not clear that these so-called reserve builds will be enough.
SunTrust, for example, added 161 million U.S. dollars in the last quarter to its loan loss reserve, citing continued housing market deterioration and "increasing economic stress on the commercial market."
However, nonperforming assets rose even more, jumping to 4.48% of total loans from 2.09% a year earlier. As a result, tumbled bank losses and reserve for 53% of nonperforming assets from 70% a year earlier. Investors like to see a number closer to 100%. BB & T, for example, has 101% coverage.
Thin reserves means SunTrust "May be exposed to material provisions ahead," according to a report from analysts at research firm CreditSights. It could take a toll on profits during the next year.
Similar trends are playing out at Comerica (CMA), the loan loss reserve has dropped to 78% of nonperforming loans from 91% a year ago, and Zion, which decreased to 65% from 79%.
The increase in nonperforming assets comes as some real estate players complain that banks are sitting on bad loans, instead of liquidate them – a trend which they claim is to suppress new lending and compounding problems in a falling market.
"The pace of these troubled loans resolved has been sluggish, "James full body harness, treasurer of the National Association of Realtors, told the Joint Economic Committee on July 10." Over 60 billion U.S. dollars in assets have been unhappy this year, but only 4 billion dollars worth of commercial loans has been resolved so far. "
Although the banking sector managed to raise tens of billions of dollars in new equity in the second quarter, it expects some funding picture to remain overcast, which increases the price decreases.
Office Rents have fallen 23% in New York and 11% in Washington from their 2008 highs, commercial property manager Jones Lang LaSalle said in its monthly market outlook newsletter this month. Meanwhile, office vacancy rates rose to 14% in Manhattan and 11% in Washington in the first quarter, reflecting the economic slowdown.
"The debt will remain constricted as banks continue to adopt the" delay and pray "approach to their real estate holdings stretching loan terms in the hope that better economic conditions will eliminate the need to exclude, "Jones Lang LaSalle said in its report.
For their part, blame bankers problems on the weak loan demand and deny they are kicking down the line can troubled credits.
"We manage these problem loans efficiently," Comerica chief executive officer Ralph Babb said in its second quarter earnings statement.
Yet the banks have underestimated their problems before. Comerica prognosis in January, this year's credit-related charge-offs or write-downs of bad loans will be in line with last year's level of 472 million dollars.
But the bank said last week that the charge-offs was 405 million U.S. dollars in the first half alone, with even "modest" improvement expected until the fourth quarter
About the Author
Richard Trincellito