Monday, February 26, 2024 – Large US banks are facing potential risks as bad commercial real estate debt has outpaced the reserves held to cover such loans for the first time since the 2008 financial crisis, filings with the Federal Deposit Insurance Corporation (FDIC) said last week.1
The filings said the data showed a significant decline in the average ratio of reserves to bad commercial real estate loans (those at least 30 days delinquent) among the biggest US banks.
This ratio fell from 1.60 in the fourth quarter of 2022 to a concerning 0.90 for every dollar of debt in the same period of 2023.
This means that for every $1 of bad debt, banks on average have only $0.90 set aside to cover potential losses, indicating a potential shortfall.
The total amount of bad commercial real estate loans held by these banks sits around $103 billion, while their reserves for such loans stand at $9.3 billion, highlighting their immediate vulnerability.
Industry analysts warn that this trend, coupled with rising interest rates and a potential economic slowdown, could lead to significant losses for banks in the coming years.
Leading institutions like JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs, and Morgan Stanley are all experiencing this decline in reserve coverage.
Some banks are taking steps to address the issue by increasing their reserves or selling off troubled properties, but the overall picture remains concerning.
It is important to remember that the data does not encompass all commercial real estate loans held by US banks but rather paints a picture of the riskiest segment.
The situation demands close monitoring as it could have significant implications for the financial sector and the broader economy in the face of economic uncertainties.
This represents a significant decline within a single year, mirroring an overall increase in delinquent commercial property debt across the sector.
The six largest US banks alone hold a combined $9.3 billion in bad debt, while the broader industry has seen delinquent loans tied to such properties more than double to $24.3 billion.
Analysts warn that these trends, coupled with rising interest rates and a potential economic slowdown, could lead to substantial losses for banks in the coming years, with estimates suggesting up to $60 billion in potential write-offs on soured commercial real estate loans.
Major jitters have gripped the commercial property market over the past year, with more than $900 billion in debt (representing over 20% of the total) owed on U.S. commercial and multifamily real estate set to mature in 2024.2
Adding to the unease, billionaire investor Barry Sternlicht recently predicted $1 trillion in losses for office properties alone.
- ft.com: https://www.ft.com/content/4114454c-a924-4929-85f4-5360b2b871c6[↩]
- businessinsider.com: https://www.businessinsider.com/commercial-real-estate-delinquent-loans-bank-reserves-office-values-economy-2024-2[↩]
