Sunday, January 18, 2009

Bad CRE Loans threaten Regional Banks

by Calculated Risk on 1/18/2009 12:57:00 PM

From the Chris Serres at the StarTribune: Loans threaten Minnesota community banks (hat tip dryfly)

Dozens of Minnesota banks have entered the new year on shaky footing, hobbled with millions of dollars of commercial real estate loans going sour at an alarming pace. ... "Any bank that has a sizable book of commercial real estate loans could have serious problems in 2009," predicted Jamie Peters, a bank analyst at Morningstar in Chicago.
...
As of the third quarter of last year, 5.7 percent of commercial real estate loans in Minnesota were more than 30 days past due, up from 3.1 percent a year ago.
...
Officials with the Minnesota Department of Commerce, which regulates 429 state-chartered banks and credit unions in Minnesota, acknowledged the problem and said they are concerned. The department's watch list of banks it considers in "less than satisfactory" condition has nearly doubled over the past 18 months to 50, from 26 in June 2007.
As I've noted several times, most regional banks avoided the residential real estate market (because they couldn't compete) and instead focused on CRE and C&D (construction & development) lending. This exposed many regional banks to excessive CRE loan concentrations, and now that CRE will implode in 2009, many of these banks will be in serious jeopardy.

Along these lines, here are some comments from Fed Vice Chairman Donald L. Kohn from April, 2008:
Setting aside the 100 largest banks, the share of commercial real estate loans in bank loan portfolios nearly doubled over the past 10 years and is approaching 50 percent. The portfolio share at these banks of residential mortgage and other consumer loans, which are more readily securitized, fell by 20 percentage points over the same period.
...
Concentration risk is another familiar risk that is appearing in a new form. Banks have always had to worry about lending too much to one borrower, one industry, or one geographic region. But as smaller banks hold more of their balance sheet in types of loans that are difficult to securitize, concentration risks can develop. Concentrations of commercial real estate exposures are currently quite high at some smaller banks. This has the potential to make the banking sector much more sensitive to a downturn in the commercial real estate market.
Here come the regional bank failures ...