Concerns about the rapid deterioration in commercial real estate (CRE) loans have prompted Fitch Ratings to seek out additional detail from banks that it covers to better understand the banks’ exposure to potential CRE loan defaults. Fitch has announced that it recently launched an information survey to obtain more “granular data” on the CRE portfolios of the financial institutions it rates.
Of the twenty largest banks rated by Fitch, CRE portfolios, excluding already distressed construction and development loans, represent more than 125 percent of total equity. More troublesome are banks with less than $20 billion in assets, as average CRE exposure represents more than 200 percent of total equity of such institutions. Fitch plans to use the information gathered from its survey to conduct its own “stress tests” of the banks its covers to determine whether ratings changes are necessary in light of what is expected to be a continued deterioration of asset quality in CRE.
Fitch recently reported that commercial mortgage-backed securities (CMBS) loan delinquencies ran past 3 percent and are expected to worsen to nearly 5 percent by the end of the year. That would represent a deterioration of 60 percent from an already alarming rate of delinquency. “The same factors that are placing pressure on CMBS transactions are increasing pressure on the performance of bank and thrift-held CRE portfolios,” according to Thomas Abruzzo, Managing Director and co-head of Fitch’s North America Financial Institutions group. Abruzzo further noted that the deterioration of construction and development loans is largely attributable to the bursting of the housing bubble. However, he continued, the 5-percent delinquency rate in the CRE portfolio “evidences more widespread problems.”
Generally, CRE portfolios of the larger banks are much smaller than the residential mortgage lending portfolios that, in part, caused the credit crisis last fall. However, with banks still in the recovery process, despite upbeat talk from their CEOs, any further shock to their capital ratios might touch off another smaller credit crisis, such as an aftershock following a major earthquake. Indeed, Japan suffered several smaller banking crises throughout the 1990s, following a severe crisis in 1991.
As part of Fitch’s expanded analysis it has sent surveys to more than 75 Fitch-rated U.S. bank and thrift institutions requesting additional detail on the institution’s exposure to CRE, covering both the banks’ loan and investment portfolios. Among the uniform information requested is: collateral type, geography, internal risk rating, and performance. Fitch also requested additional detail on each bank’s largest exposures and watch credits. Fitch has asked that this information be provided by the middle of September.
Gregg D. Killoren
victoria1014
Economic Growth Coming, But Not at Levels Expected by Equity Markets
The U.S. economy in the second half of 2009 should show positive growth in gross domestic product. Due mostly to inventory drains created by public spending, many businesses will place orders to restock their supplies. However, to predict what may come in 2010 is extremely difficult due to an unusual number of factors at play, especially government spending. Investors should be wary of equity markets as they seem to have been pricing in the certainty of a robust rebound. That does not mean that there are no good stock picks to be made; rather, one should not rely on index or sector funds or diversification without some type of downside protection, like put options.
The growth that will come in the second half of 2009 may prove ephemeral. Although inventories will need to be replenished due to stimulus programs like “cash-for-clunkers,” a sustainable recovery cannot be had without increases in real personal income, real manufacturing and wholesale-retail trade sales, industrial production and payroll employment. Further, an increase means real positive growth in these numbers, not simply the “less bad” figures that have driven the market rally thus far.
By the middle of 2010, the inventory restocking should be over, but also, much of the $787 billion stimulus of the American Recovery and Reinvestment Act of 2009 will be spent. How those two factors will play against each other remains to be seen and is difficult to forecast because we have very few historical examples to draw on. The recession of the 1970′s offers some similarities, but there was no massive stimulus package then. Moreover, private demand is likely to remain weak, and the irony of so much public spending is that it tends to crowd out private spending even when there is demand.
The relief that a catastrophic financial meltdown has been averted is reasonable; as is the pop-up in equity markets from their March 2009-the-world-is-coming-to-an-end lows. But the question that markets are just beginning to be troubled by is: Where is sustainable growth going to come from? Public spending may have saved us from ruin, but going forward, it will do more harm than good.
Investors interested in opportunities stemming from the U.S. stimulus package may be interested in the following post: U.S. Fiscal Stimulus: Analysis for Investors.
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Posted in Economy
Tagged American Recovery and Reinvestment Act of 2009, Economy, Fiscal Stimulus, Market Commentary