Bank loans for commercial real estate have been under the microscope ever since
New York Community Bancorp
took a surprise charge for loan loss reserves a month ago. Regional banks that specialize in such loans saw their already weak stock prices lose another 10%.
So Barron’s is examining the banks with the highest concentration of commercial real estate loans, repeating an exercise we did a year ago. Our conclusion: They appear to have the risks under control to a greater degree than the market appreciates.
Many names are the same as when we looked a year ago, including
Valley National Bancorp,
Bank OZK,
and Washington Federal parent
WaFd.
One of last year’s heavy lenders, PacWest Bancorp, left the list as it was pressed into a merger. Others landed on the list of concentrated lenders because of a merger. And then there is
Merchants Bancorp,
which blames high interest rates for keeping more loans on its books, as borrowers postpone fixed-rate refinancing.
Nonperforming loans have ticked up at the banks with heavy real estate lending, but remain close to industry averages. Capital levels and profit margins are holding up. These banks say they lend to commercial real estate because they are good at it and haven’t lent heavily to the downtown office towers plagued by vacancies.
Investors aren’t convinced. In the past 12 months, the
SPDR S&P Regional Banking exchange-traded fund
sank over 20% even as the
S&P 500
rose 28%. Most of the concentrated real estate lenders in our ranking trade at lower earnings multiples than their banking peers.
The market hasn’t forgotten the 1980s and early 1990s, when bad real estate loans helped bring down hundreds of savings and loans. Or 2008, when bank losses on imprudent residential lending threatened the U.S. financial system.
The regional banks on Barron’s list say this time is different. They say they are well capitalized and their real estate lending is more conservative.
Bank OZK chief executive George Gleason says he takes his bank’s 11% selloff over the past month in stride, knowing that investors can lump differentiated lenders together. “When you say commercial real estate, you are talking about 1,000 different things using one term,” Gleason says.
With the second-highest concentration of commercial real estate loans among large banks at year end 2023, OZK outperformed every U.S. bank above $10 billion in assets, in 2023 year profitability and capital ratios. Over the 27 years since OZK came public, its stock has outperformed the
S&P 500
by tenfold.
At WaFd, chief executive Brent Beardall says the bank is playing it safe by lending to fully leased apartment complexes in its Northwest region. “If we wanted to diversify into something else, we’d be taking more risk,” he says.
Commercial real estate was an economically sensitive business long before the current stresses of hybrid work and higher interest rates. The S&L crisis of the 1980s and 1990s led federal regulators to issue guidelines in 2006, setting out levels of commercial real estate lending that would lead to extra scrutiny of a bank’s books. Bank regulators reiterated the guidance after the 2008 financial crisis and the Covid pandemic.
The guidelines define two tests that may prompt regulators to further analyze “the level, nature, and management” of a bank’s commercial real estate concentration risk. The first test is whether loans for non-owner-occupied commercial real estate exceed 300% of a bank’s capital and have grown more than 50% in the past 36 months. The second test is whether loans for construction and land development exceed 100% of capital.
As we did after the regional bank failures in early 2023, we asked S&P Global Markets Intelligence to scour the year-end 2023 federal bank filings to find lenders whose commercial property loans exceed the 2006 guidance levels. We then ranked the largest 10 publicly-held banks in the group, by assets.
These concentrated lenders aren’t the nation’s biggest banks. The New York-area Valley National Bank is the largest on our list, and it’s only the 26th largest bank in the country. The other nine inhabit the bottom half of the country’s top 100 banks by assets.
Nor do these banks even have the largest books of commercial real estate loans, by dollars. That is a function of size.
JPMorgan Chase
lends the most to developers—according to S&P—with $173 billion in commercial property loans, followed by $140 billion at
Wells Fargo
and $83 billion at
Bank of America.
Still, commercial real estate comprises 15% or less of their total loan books, far less than the banks on the Barron’s list.
The sixth-largest book of commercial real estate loans at December’s end, per S&P, happened to be New York Community Bank. Its $48.5 billion in loans amounted to 56% of the bank’s total. It isn’t on the Barron’s list, however, because its lending levels didn’t surpass any regulatory guidelines.
Valley National was the 12th largest commercial property lender, with $28 billion, or 55% of its loan book. OZK was No. 17, with $20 billion, or 74% of its loans.
In dollar terms, the concentrated lenders wouldn’t directly threaten the banking system, if they ran into trouble. But as NYCB’s misfortunes proved, investor psychology matters, and bank stocks are very much threatened by real estate worries.
Like most property lenders in the last 18 months, there has been a rise in loans that are late on their payments, at the concentrated lenders. Since our early 2023 tally, these “nonperforming assets” have edged up from below 0.5% of loans and foreclosures, to a little above 0.5%, on average at year end. Some remain comfortably below the industry average of 0.44% in their nonperforming loan levels, including WaFd, the Massachusetts-based Rockland Trust, Alabama-based
ServisFirst,
and New York-based
Dime
Community Bancorp.
Some of the loan concentrations in these banks do reflect economic stresses in real estate. Merchants Bancorp makes short-term floating-rate loans to developers of affordable multifamily apartments, which conform to federal housing programs. Those programs penalize prepayment.
So developers are delaying refinancing to a fixed-rate long term loan, says Merchant chief executive Mike Dunlap, until rates subside. Merchants normally sells off fixed-rate loans, so its commercial real-estate loan book has enlarged. Still and all, the developers are making their loan payments.
Mergers are another reason that banks show up on the list, by triggering the three-year growth element of the loan guidelines. A 2023 merger combined Umpqua Bank and
Columbia Bank.
Dime merged with Bridge Bancorp in 2021. Valley National did three mergers in the last three years.
But a goodly number of these banks have concentrations in commercial real estate because that is their specialty.
Las Vegas-based
Axos
has a practice in making superjumbo mortgage loans to wealthy homeowners. It also took on the loan for former President Donald Trump’s Doral golf resort in Miami, after
Deutsche Bank
dropped him as a client. Axos charged a higher interest rate, according to pleadings by New York State’s Attorney General at Trump’s recent civil fraud trial.
OZK is one of the leading originators of construction loans, for high profile projects around the country. That is why such loans exceeded 237% of its capital in December. But chief executive Gleason says that his bank’s underwriters perform stress tests that go well beyond what regulators require.
“We’ve averaged about 35% of the industry’s level of net charge offs,” Gleason says. “That means that our credit quality is three-times better than the industry as a whole.”
Nearly every banker at these commercial real estate lenders believes that investors have penalized their stocks unjustly.
Valley National chief executive Ira Robbins says his bank was mistakenly compared with New York Community Bank, even though only 30% of his loans are in New York City, and just 10% in Manhattan.
“It isn’t even the same loan book,” Robbins says.
Write to Bill Alpert at [email protected]
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