A bad surprise! Moody's warns
The latest news shows that the internationally renowned rating agency Moody's has placed six regional banks in the United States on a negative watch list, and these banks' credit ratings are at risk of being downgraded. Moody's said the banks have significant exposure to commercial real estate loans.
Currently, U.S. commercial real estate is facing pressure, and small banks’ commercial real estate risk exposure is much greater than that of large banks. At the end of March this year, rating agency S&P Global lowered the rating outlook of five regional banks in the United States to "negative." In August last year, Moody's downgraded the credit ratings of many U.S. banks, triggering a sell-off in U.S. financial stocks.
On June 6, local time, the international rating agency Moody's stated that at least six U.S. regional banks with large commercial real estate loan exposures are at risk of having their debt ratings downgraded.
Moody's has placed the long-term ratings of six banks, including First Merchants Bank, Fulton Financial, Old National Bank, Pipak Gladstone Financial, Washington Federal Reserve, and FNBC Corp., on the negative watch list for possible downgrades.
Moody's said regional banks with large commercial real estate loans face ongoing asset quality and profitability pressures as persistently high interest rates exacerbate longer-term risks, especially during cyclical downturns.
Moody's noted that during the low interest rate environment before the start of the Federal Reserve's rate hike cycle, many regional banks chose to build and maintain sizable exposures to commercial real estate, a "volatile asset class." In the case of Fulton Financial, this asset class held 267% of tangible common equity as of March 31.
New York community banks have been in turmoil recently. At the end of January this year, New York Community Bank unexpectedly announced quarterly losses and provisions for credit losses, which aroused market concerns about its commercial real estate exposure, causing its stock price to plummet 60% in five trading days; in early March, the bank once again exploded. , due to the discovery of problems with the loan review process, New York Community Bank wrote down US$2.4 billion in goodwill, resulting in a revision of the loss in the fourth quarter of 2023 to US$2.71 billion, an increase of more than ten times from the originally disclosed loss amount. In the following two days, the Bank shares plunged another 43%. Since then, under the leadership of former U.S. Treasury Secretary Steven Mnuchin, a number of private equity funds announced a joint equity investment of US$1.05 billion in New York community banks on March 6, which stabilized market sentiment.
Since then, investors have begun to closely monitor U.S. regional banks with significant exposure to commercial real estate loans. The International Monetary Fund warned in mid-March that the banking industry's excessive exposure to U.S. commercial real estate could lead to a repeat of the chaos caused by the collapse of Silicon Valley Bank last year. In addition, in April, the IMF's semi-annual "Global Financial Stability" report showed that by the end of 2023, the proportion of non-performing commercial real estate loans in U.S. bank investment portfolios had doubled from the same period last year to 0.81%. The IMF also noted that banks continue to increase provisions for non-performing commercial real estate loans.
Some banking industry insiders pointed out that as a large amount of real estate debt matures in the next three years, there is increasing speculation that if the default rate of commercial real estate loans climbs to uncontrollable levels, the U.S. banking industry may fall into another major crisis. In the United States, commercial real estate loans are worth $2.7 trillion, accounting for about a quarter of the average bank's assets. During the low-interest rate environment of the past decade, many loans were made at rock-bottom rates, and borrowers' painful experience repaying commercial real estate loans at today's significantly higher interest rates has put enormous pressure on U.S. lenders.
In addition, to make matters worse for commercial real estate lenders, factors such as the economic slowdown and the strong preference for remote and hybrid work arrangements after the epidemic have not only further led to a sharp rise in the distress of the US commercial real estate market, but also considerable pessimism about US commercial real estate prices. According to GreenStreet's Commercial Real Estate Price Index, commercial real estate prices have fallen 7% over the past year and 21% since the peak in March 2022. Last year, the total amount of delinquent loans related to commercial properties such as shopping malls, offices and industrial units was estimated to be as high as US$24.3 billion, more than double the US$11.2 billion in 2022.
On Tuesday local time, a regional bank was shorted by institutions. At the time, Hindenburg Research released a report targeting regional bank Axos' commercial real estate exposure and "excessive" valuation premiums, making Axos the latest bank to come under scrutiny. Hindenburg Research blames its "lax lending standards" that will be affected by a sharp deterioration in the U.S. commercial real estate market.
On Tuesday, Axos's stock price plummeted by more than 16%, and the decline narrowed to 4% at the close. Axos said in a statement that Hindenburg's report contained a series of false accusations. Axos said its $5.2 billion commercial real estate specialty lending business operates almost entirely through fund partners, a structure that provides the bank with "strong joint protection in adverse market conditions."
Rising interest rates have heightened concerns about risks to U.S. commercial real estate, with one indicator showing values plummeting 21% as of April from a peak in March 2022. An Axos report showed it had more than $5.9 billion in commercial real estate loans as of the end of March, with multifamily and hotels being its largest commercial real estate exposures.
Bloomberg said that while Hindenburg’s report did not mention Trump, Axos had ties to the billionaire and helped refinance a Trump Tower loan and finance a resort in Florida. Last month, a New York court jury ruled that former U.S. President Trump was guilty of all 34 charges in the "hush money" case. Trump became the first former president of the United States to be convicted.
High borrowing costs have hit real estate valuations, while uncertainty over a rate cut by the Federal Reserve has exacerbated the challenge. Josh Zegen, co-founder of lender Madison Realty Capital, said, "The real estate industry is starting to have some problems, and it will be more and more this year, and people are starting to see more cracks."
However, some alternative asset managers see opportunities. Days earlier, Blackstone CEO Schwarzman said the investment giant was in talks with several regional U.S. banks to explore acquiring their assets and loans. He said pressure on these regional banks would come not just from the market but also from regulators, which would reduce their ability to provide credit.
Schwarzman said the retreat of regional banks from the business of providing credit to the broader economy would make Blackstone a beneficiary and natural partner. Companies like Blackstone have an opportunity to fill this gap.
Blackstone, with nearly $1 trillion in assets under management, is the world's largest alternative asset manager and a growing provider of non-bank financing.
