Banks with large commercial real estate exposures have had a tumultuous last few years, but a new S&P Global Ratings report indicates the outlook is improving.
The report concludes that while CRE exposure will continue to hamper some banks, the likelihood of CRE problems leading to a weakening in the creditworthiness of banks has declined over the last year.
As a result, S&P revised its ratings outlooks for Columbia Banking System Inc., First Commonwealth Financial Corp., M&T Bank, Synovus Financial Corp., Trustmark Corp. and Valley National Bancorp from negative to stable.
S&P noted that all of these banks have greater than normal exposure to commercial real estate. Many of these banks reported a decline in asset losses and increased their capital and deposits. At the same time, they reduced their exposure to CRE, especially with office loans, through runoffs, paydowns and sales.
"Although we expect CRE charge-offs to continue, due to a combination of CRE price stabilization and balance sheet improvement, even banks with more concentrated exposure to CRE loans should be able to better absorb such losses without substantially affecting earnings," the S&P report says.
Many banks ramped up loan modifications late last year as borrowers failed to meet obligations and pressures in weaker sectors like the office market mounted.
Last year, S&P downgraded the outlook of five regional banks because of their commercial real estate exposure. Many banks were also delaying the disclosure of distress in their portfolios by keeping loans on their books for longer and not doling out as many new mortgages.
