Delinquency rate on US banks' commercial real estate loans rose in Q1

The delinquency rate on commercial real estate loans at U.S. banks ticked up in the first quarter, reversing a yearlong trend of falling delinquencies.

The rate rose through the early quarters of the COVID-19 pandemic and reached a recent peak of 1.02% in the fourth quarter of 2020 — its highest point since the second quarter of 2015 — before falling throughout 2021 as pandemic restrictions loosened. In the first quarter, however, delinquent CRE loans at U.S. banks rose again, to 0.72% of total loans, compared to 0.71% a quarter earlier.

Regulators define commercial real estate loans as construction and land development loans + multifamily loans + nonowner-occupied nonresidential property loans + commercial real estate loans secured by collateral other than real estate.

The first-quarter rate is well below the delinquency rate of 0.94% in the year-ago quarter but higher than the first-quarter 2020 rate of 0.68%, near the start of the pandemic in the U.S.

Meanwhile, the number of U.S. banks exceeding regulatory guidance on CRE loan concentration grew for the fourth straight quarter to its highest level since the second quarter of 2019.

Rising CRE exposure

Regulators increase their scrutiny of banks that exceed either of two thresholds: construction loans over 100% of risk-based capital or CRE loans over 300% of risk-based capital levels and 50% growth in CRE over the last 36 months. The number of banks exceeding either metric rose by 5.5% sequentially and 50.5% year over year to 441 in the quarter, according to S&P Global Market Intelligence data.

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The count of banks exceeding CRE loan concentration guidance fell through 2019 and 2020, to 293 in the first quarter of 2021, before rising through the last year.

Largest banks exceeding guidance

The largest bank exceeding regulatory guidance in the first quarter was Wayne, N.J.-based Valley National Bank, with $43.42 billion in total assets. Valley National posted 63.2% CRE loan growth in the last 36 months while having a ratio of CRE loans to Tier 1 capital plus allowance for loan and lease losses of 397.4%.

The largest banks to exceed both of the regulatory thresholds in the quarter were Seattle-based Washington Federal Bank, with $20.57 billion in total assets, and San Diego, Calif.-based Axos Bank, with $14.77 billion in total assets.