Loan Exposures Raise Concerns
Standard & Poor’s (S&P) has downgraded five regional banks due to their exposure to the struggling commercial real estate (CRE) market. The downgraded banks include First Commonwealth Financial Corp., M&T Bank Corp., Synovus Financial Corp., Trustmark Corp., and Valley National Bancorp.
S&P warns that the banks’ significant loan exposure to CRE could lead to a decline in asset quality and performance. The report highlights that banks with sizable CRE loan portfolios are facing challenges due to falling property prices and higher vacancies, particularly in investor-owned office properties.
M&T Bank’s High Exposure
M&T Bank stands out as having one of the highest exposures to CRE. S&P notes that the bank has over $33 billion in loans to the sector, which represents 25% of its total loans and 174% of its Tier 1 capital. Office loans, which have been particularly affected by the shift to remote work, make up a significant portion of M&T’s portfolio.
Potential Losses and Mitigation
S&P acknowledges that potential losses on CRE loans could be partially offset by conservative loan-to-value ratios at origination. However, the report warns that unfavorable long-term trends in the office market could lead to further deterioration.
Industry Concerns
The downgrades come amidst broader concerns about the CRE market. Last month, IMF insider Desmond Lachman warned that CRE could be an Achilles heel for the banking industry, potentially leading to the failure of hundreds of small and medium-sized banks.
