US banks shed exposure to risky CRE loans in Q3

U.S. banks reduced their exposure to riskier commercial real estate loans in the third quarter. While credit quality metrics remain near-pristine, some bankers are still cautious on CRE as it is still unclear how the COVID-19 pandemic will affect the long-term prospects of asset classes such as office buildings.

The sector's aggregate balance of high-volatility CRE, or HVCRE, loans dropped 17.1% sequentially and 11.6% year over year to $35.79 billion as of Sept. 30, according to an analysis by S&P Global Market Intelligence. The analysis included banks with at least $1 billion in total assets that did not opt into the community bank leverage ratio framework. Across the industry, the median linked-quarter decline was 29.9%.

HVCRE loans include acquisition, development and construction loans for income-producing CRE, with some exclusions. HVCRE loans carry a 150% risk weighting in certain regulatory ratios, requiring additional capital support.

As a percentage of risk-weighted assets, HVCRE loans were down to 0.27% as of Sept. 30, compared to 0.33% at June 30 and at Sept. 30, 2020. The industry median was 0.56%.

The top 20 banks by HVCRE holdings accounted for more than half of the industry's total HVCRE loan balance. Goldman Sachs Group Inc. topped the list, with $3.13 billion of such loans in its portfolio.

Among these 20 banks, Wells Fargo & Co. recorded the largest sequential decrease in the portfolio, with the balance down 46.4% in a single quarter to $1.84 billion.

During Wells Fargo's third-quarter earnings call, Wells Fargo CFO Michael Santomassimo said its CRE portfolio has continued to perform well, and the recovery in retail and hotel properties reflected increased liquidity and improved valuations. The executive, however, noted the bank continues to be cautious on the office sector.

"While we have not seen any widespread stress in office, we continue to watch this sector closely and believe that any impact as a result of return to office or hybrid working plans will take time to play out," Santomassimo said, according to a transcript.

At Truist Financial Corp., the HVCRE loan portfolio declined 10.2% during the third quarter to $1.18 billion.

CEO William Rogers said during the bank's earnings call that Truist has been "somewhat cautious" in CRE, although it is beginning to see opportunities that meet its risk appetite and portfolio diversity objectives.

M&T Bank Corp., meanwhile, reported an increase in HVCRE loans of 8.1% during the third quarter to $545.9 million.

The bank expects the amount of CRE loans on its balance sheet to decline. CFO Darren King said during the bank's earnings call that the December 2020 stress test results suggested there may be more capital-friendly ways to service the CRE industry beyond holding the loans on the balance sheet.

In a conference presentation held Nov. 4, Chairman and CEO Rene Jones said the bank's current view is that it "probably" can increase pre-provision net revenue and add more services using its expertise in CRE while reducing exposure.

At Banner Corp., HVCRE loans inched up 1.6% in the third quarter to $295.0 million. Chief Credit Officer Jill Rice said during the institution's Oct. 21 earnings call that while commercial and commercial real estate pipelines remain strong, line utilization and borrowing for capital expenditures continue to be hampered by excess liquidity as well as supply chain and labor shortage issues.

On the demand side, respondents to the Federal Reserve's October senior loan officer opinion survey on bank lending practices reported that demand for construction and land development loans remained "basically unchanged" during the third quarter.