Zhitong Finance learned that S&P Global Ratings said on Tuesday that the asset quality and performance of some US regional banks may be affected by pressure from the commercial real estate market. The agency downgraded the rating outlook for five banks from stable to negative. S&P said in a statement that restructuring loans and an increase in loan terms “may indicate a decline in asset quality and performance.” S&P downgraded the ratings outlook for First Federal Finance Corporation (FCF.US), Bank of America (MTB.US), Synouse Finance (SNV.US), Trustmark (TRMK.US), and Valley National Bancorp (VLYPP.US) because these five banks have the “highest” risk exposure to commercial real estate loans among their rated banks.

S&P said that if the Federal Reserve starts cutting interest rates, it may “ease some of the cumulative pressure on the commercial real estate industry,” adding that its revisions to banking prospects address potential risks “that may arise if interest rates remain high for a longer period of time.”

Some regional banks have been named many times

Financial analysts at Evercore ISI have also previously discovered that the commercial loan exposure of several regional banks has increased, which should attract investors' attention. Among them, several banks that have drawn a red line by the investment bank coincide with the list mentioned by S&P. According to Evercore's research, if commercial real estate continues to be in trouble, four banks will be at risk: Cullen Buddha Bank (CFR.US), American Commercial Bank, Synouse Financial, and Citizens Financial (CFG.US).

Evercore analyst John Pancari said that although loan defaults (or write-offs) have not reached the level during the financial crisis, continued losses in the commercial sector may force at-risk banks to increase their cash reserves. Having said that, Pancari doesn't see these banks at risk of going out of business in the face of increased commercial loan defaults.

35% of Kulun Buddha Bank's loans relate to commercial real estate, and its loan reserve is 1.45%. One favorable factor is that Kurum Buddha Bank's average loan cash flow is 1.44 times debt expenses, which means that many of its loans are real estate to generate income and repay debts.

Synous Finance concentrates 32% of its loans on commercial real estate, with a reserve ratio of 1.09%. However, the CEO of Synous Finance said the bank had few problem loans and limited new commercial loans.

Citizens Financial's 19% loan exposure is commercial real estate, with a reserve ratio of 2.2%. Citizens Financial's situation is worrying, as office loans account for a large share of 19% of commercial real estate loan exposure. It also has a 10.2% reserve for office loans. This is important because the office market is probably the least popular sector in commercial real estate.

Commercial real estate loans from American Commercial Bank account for 24% of its total loans, and the reserve ratio is 1.9%. If CCB were to undergo a stress test, like the Federal Reserve's tests on large banks such as Wells Fargo after the 2008 financial crisis, these reserves would account for 22% of the losses of CCB.

According to the American Bank of Commerce, its outstanding commercial loan balance is the lowest in 15 years, with a loan to real estate value ratio of 56%. In a recent earnings conference call, Daryl Bible, CFO of American Commerce Bank, said: “We are very satisfied with the current state of reserves. I can't guarantee it won't go up. But we have made a very thorough assessment of high-risk credit types in the (commercial real estate) sector.”

Although Pancari believes that large-scale commercial real estate defaults are unlikely to hurt savers' interests, stock performance may be affected. History shows that as soon as a bank goes bankrupt due to non-performing loans, it will trigger a chain reaction and trigger a regional banking crisis.

Nearly $1 trillion in commercial loans will expire by 2024, and many developers will likely not be able to refinance at interest rates that keep the project profitable. This will inevitably lead to default and could put some regional banks at risk of bankruptcy.

“Shorting forces” are once again targeting US commercial real estate

The current liquidity pressure faced by regional banks in the US, the continued slump in US office prices, and high benchmark interest rates have caused some retail investors and fund managers to once again be bearish on one of their favorite industries: commercial real estate. In recent weeks, banks such as New York Community Bank (NYCB.US) and Deutsche Bank (DB.US) have made additional reserves for losses related to real estate loans. In the US, small and medium-sized regional banks are often very exposed to commercial real estate, and may be adversely impacted much more severely than larger commercial banks. According to a Real Assets report previously released by MSCI, the value vulnerability of commercial office buildings in the US and Europe continues to exist, which in turn caused the value of commercial office buildings in the US to plummet by about 15.2% in the year ending February this year.

Commercial real estate can be described as the area most likely to trigger a systemic credit incident by US stock investors. As commercial real estate values plummeted, investors pulled out of real estate funds one after another. This concern reflects the continuing downward trend in commercial real estate values in the US under the pressure of high interest rates, and the difficulty of predicting which specific loans may collapse. The reason behind this situation may be that the COVID-19 pandemic has caused people to habitually switch to remote work (especially in tech companies, where more and more employees are choosing to work remotely), and interest rates quickly rose to their highest level in 22 years after the start of the Federal Reserve's interest rate hike cycle, making it more expensive for struggling borrowers to refinance.

Moreover, after the New York community banking performance at the end of January this year surged in the scale of shorting in the regional small to medium banking sector in the US stock market due to turbulent commercial real estate, recently shorting forces have once again returned to commercial banks with commercial real estate exposure, especially regional banks. According to S&P Global statistics, close to 13% of New York Community Bank shares are currently shorted, far higher than 3% in November. One important reason is that the bank is an important player in New York's multi-family apartment buildings, where rents are controlled or forced to stay within a stable range, so the actual value of these apartment buildings has been falling rapidly.