FDIC: Overdue Office Loans Are New Pain Point For Banks

Though the U.S. banking industry is still posting relatively strong net income as of the third quarter, past-due loans associated with CRE, especially office properties, represent a risk to the industry, Federal Deposit Insurance Corp. Chairman Martin Gruenberg said in a speech this week.

Both the percentage and value of past-due and noncurrent CRE loans tied to office buildings that aren't owner-occupied have spiked, according to FDIC data, with the noncurrent rate the highest since the third quarter of 2014.

Noncurrent CRE loans increased by $4.1B, or 36.4%, quarter-over-quarter in Q3. Most of the trend is being driven by bum office loans, Gruenberg said.

“Deterioration in the [banking] industry’s commercial real estate portfolio is beginning to materialize in office properties, in which weak demand for space, softening property values and higher interest rates are affecting the credit quality of underlying loans,” Gruenberg said.

But the overarching interest rate environment has made things difficult for owners of all property types, he said.

“Higher interest rates pose risks for other commercial real estate properties as well, as maturing fixed-rate loans will need to be renewed at what are now much higher market interest rates,” Gruenberg said.

Overall, net income for the banking industry came in at $68.4B in the third quarter, down $2.4B, or 3.4%, from the previous quarter. With the exception of the financial impact of the agency's seizing of three large banks that failed earlier this year, net income for the industry has been roughly flat for the last four quarters, according to the FDIC.

“The banking industry still faces significant challenges from the effects of inflation, rising market interest rates and geopolitical uncertainty,” Gruenberg said, adding that these risks, combined with concerns about commercial real estate fundamentals, especially in office markets, are “matters of continued supervisory attention by the FDIC.”