Next Wave of Stress Tests To Focus on CRE

Many of the nation’s community and regional banks turned to commercial real estate lending during the last run up to boost profits through higher yields. Now, many of these same banks are saddled with commercial real estate debt on their books, and some banks such as Sterling Financial have 50% of their loan exposure in commercial real estate. Worse still, they are experiencing 15% delinquency rate on their commercial loans. So even if you assume the other 50% of their portfolio has only a 2% delinquency, overall that put’s their delinquency at nearly 9%, which likely puts them in negative return territory on their assets, and this is on top of write-downs they need to take on the values.

The Federal Reserve is reportedly set to launch another series of “stress tests” – this time aimed squarely at some 800 regional and community banks it has tabbed as big CRE lenders. And as many as 2,000 institutions with non-owner-occupied CRE loans above supervisory thresholds of 300 percent of capital, or development loans above the 100 percent-of-capital levels, can expect a grueling exam season. “If a bank is not below those levels, it’s looking at an administrative action of some sort,” says Peter Weinstock, a financial institutions partner at Hunton & Williams in Dallas.

One of the worst offenders is UCBH (United Commercial Bank Holdings) out of San Francisco, where it’s $12.8B asset portfolio has some 60% exposure to commercial real estate, and is experiencing a 14.4% delinquency.

“There’s not going to be a financial institution in America that doesn’t suffer some problems with commercial real estate,” says Ray Davis, CEO of Umpqua Holdings Corp. in Portland, Ore. About 55 percent of Umpqua’s loans are tied to CRE. Davis says he has stress-tested the portfolio “a variety of times,” and believes that aside from the occasional “one-off,” conservative underwriting, based on debt ratios, the $8 billion-asset company has little to fear. “If you were a loan-to-value underwriter, you’re going to have problems,” Davis says.

[via American Banker]

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