More Banks Exceed CRE Loan Concentration Limits

Great article on the trends.  It is interesting to relate the trend of banks exceeding Fed guidance for CRE concentration combined with the upward trend towards online shopping, service, etc. and the post-pandemic reality of increased remote work arrangements, both full-time and hybrid.  Having a CRE concentration could be a risk to banks if the CRE market has not caught up to the realities potentially driving decreased demand for commercial space.  In areas with very expensive commercial space (e.g. New York, San Francisco, etc.), it will be interesting to see if the trend of current realities impacts CRE valuations.  Collateralization and stress testing will be key for CRE portfolios to ensure the banks' portfolios could weather a 30% decline in CRE market values without having to take substantial losses.

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Matt Johnson
CFO
Premier Bank
Omaha, NE
Posts reflect my personal opinion and do not represent any organization in which I am affiliated.
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Original Message:
Sent: 09-22-2021 11:02
From: Barb Rehm
Subject: More Banks Exceed CRE Loan Concentration Limits

The number of U.S. banks exceeding federal guidance on commercial real estate loan concentration rose sequentially in the second quarter for the first time since the fourth quarter of 2018, according to this week's complimentary post from S&P Global Market Intelligence. Because the increase followed a long decline, fewer banks exceeded the guidance in the quarter than a year earlier. Still, two key metrics grew sequentially: the number of banks with construction loans exceeding their level of risk-based capital and the count of banks with both high loan levels and high growth in their CRE books.

On the positive side, CRE loan delinquencies, which rose steadily through 2020, fell for the second straight quarter to represent 0.85% of total bank CRE loans. But while the second-quarter level was down from a fourth-quarter 2020 peak of 1.02%, it remained higher than any quarterly delinquency rate from 2016 through 2019.

As usual, Market Intelligence has some excellent charts, so be sure to check out the full story.

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Barb Rehm
Senior Managing Director
IntraFi Network
Arlington VA
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