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US banks disclose retail exposure as distress mounts in the space

The inventory of distressed retail assets is increasing as the COVID-19 pandemic deepens, and many banks are disclosing their exposure to the industry.

By nominal amount, Bank of America Corp., Wells Fargo & Co. and U.S. Bancorp are among the U.S. banks with the most exposure to commercial retail borrowers. And there are signs the sector is struggling. A second-quarter report from Real Capital Analytics showed the inflow of distress in the second quarter was more than twice the average quarterly inflow in 2009 when the business world was mired in the global financial crisis. The report estimated that "potentially distressed assets" totaled $29.4 billion for the first half of 2020.

"Distress has hit the retail sector hard," the commercial real estate data firm Real Capital Analytics said in a second-quarter report. "The pain does not appear to be ending for the retail sector."

Wells Fargo has roughly $49.7 billion in outstanding loans to three retail lending categories, including $23.1 billion in commercial-and-industrial and lease financing loans, $14.1 billion in commercial real estate loans excluding shopping centers, and $12.5 billion in shopping center-specific commercial real estate loans. Together, the activity represents about 5.1% of the bank's gross lending, according to S&P Global Market Intelligence data.

Bank of America has $29.6 billion in outstanding loans to general retailing operations and $6.4 billion in loans to food and staples retailing. Together, the lending categories represent roughly 3.6% of the bank's gross loans.

U.S. Bancorp has $14.3 billion in loans to retail borrowers, a category that includes restaurants in its case. The total represents 4.5% of the bank's gross lending activity.

Simmons First National Corp. has relatively high proportional lending exposure to the retail space. Its $1.4 billion of retail loans comprises 9.4% of its gross lending activity.

In an interview, Meghann Martindale, global head of retail research at CBRE, said there will be more bankruptcies in the retail space in the months ahead, as many brands that were struggling before the pandemic capitulate, and others fall victim to unprecedented market conditions.

"To me, that's the bigger unknown, is how many more brands are going to be affected by the rolling closures that we're seeing in some of the markets that are spiking [in coronavirus case counts], and what could be a longer-term recovery in terms of getting the consumers back through the door?"

The pandemic has accelerated the structural change that was already underway in retail as a result of shifts in consumer behavior and the spread of e-commerce, Martindale said. Retailers and their landlords who had thought they might have years to reposition and redevelop now likely have no more than 24 months, she said.

However, there are some pockets of relative strength as consumer confidence has begun to creep up in recent weeks. Martindale cited health and wellness, athleisure apparel and auto-related categories among the stronger, more resilient corners of the retail industry. Fast casual dining enterprises with takeout and delivery services have also experienced a boost from the broad closure of sit-down, in-store dining.

"As much as we're seeing a strategic contraction with a lot of the soft goods, apparel — those types of brands ... we are seeing some of these other categories that are looking at this very opportunistically to come in and try to take advantage of sites as they're becoming available with closures," she said.

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