Banks Increase Their CRE Loan Charge-Offs

Banks, particularly regional ones, don’t seem to in the best of shape. Aside from the handful of closures earlier this year, Moody’s cut credit ratings of a group of smaller and regional banks and put a number of bigger banks on review for a potential credit downgrade on Monday. The total was rating actions on 27 banks.

Backing up that decision is the new information about banks charging off $19 billion in commercial real estate loans and consumer credit cards in the second quarter of 2023, according to a Financial Times report. It was an increase of nearly 17% quarter over quarter and 75% over 2022 Q2. Unfortunately, the information doesn’t break out the split between credit cards and CRE loan, and so could lead to an incorrect conclusion.

At the end of June, there were $2.92 trillion in commercial real estate loans from commercial banks, according to data from the Federal Reserve in the so-called H.8 report August 4. The total of $19 billion would suggest a roughly 0.65% rate.

The 2023 Q1 quarterly charge-off rate of commercial real estate loans by commercial banks was 0.07%, according to the Fed. A full jump to 0.65% would be a figure not seen since 2012. However, again, the charge-off figure includes credit cards. During the first quarter of this year, the charge-off rate of credit card loans by commercial banks was 3.02%. So, the commercial real estate portion of the second quarter charge-offs as reported is likely much smaller.

Still, any increase in CRE loan charge-offs becomes more pressure from investors and depositors on banks to reduce their exposure and keep asset value high. It was only in May that PacWest sold its CRE loan portfolio to Kennedy Wilson and its real estate lending arm to Roc360 — and still the bank ultimately had to sell itself to Banc of California.

Now Kennedy Wilson tells MarketWatch that it could double its current $7 billion commercial real estate loan portfolio over the next few years, even with the Moody’s report and uptick of charge-offs. If anything, the latter might make it easier for the company and others looking to pick up distressed CRE loans from banks. Getting some value is better than a full charge-off for the institutions, which means seeing more blocks of loans or even entire portfolios put out to sell is quite possible.

Kennedy Wilson relies on insurance companies and sovereign wealth funds for its backing, and both sources might be comfortable with distress purchases. Although the company says that it will likely stick to multifamily and student housing rather than other areas like office and retail have seen significant drops in property values.