Friday, January 12, 2024

One simmering risk in the economy these days is the commercial real estate market. Vacancy rates for office space are at an all-time high, and many owners of commercial real estate face painfully high refinancing rates. That could lead to a market meltdown.

So Calcbench wondered: What are the risks to banks that carry commercial real estate loans on their books? 

That question is not hard to answer if you have the right tools and know where to look — like, say, by using Calcbench. We offer an example below.

We pulled up the commercial real estate loans reported by 25 large banks in their 2022 annual reports, and compared those holdings (which are listed on the balance sheet as an asset) against total assets for that year. Figure 1, below, shows the 10 largest holders of commercial real estate that we found.

OK, that’s kinda cool, but for financial analysts the most important column is the one on the far right: the ratio of commercial real estate loans to total assets. The higher that percentage is, the bigger the threat to stockholder equity if commercial restate takes a nasty turn and banks need to start writing down those holdings.

So Figure 2, below, ranks the banks based on that ratio.

As you can see, none of the country’s largest banks (Bank of America, Citigroup, JP Morgan, Wells Fargo) are on this list. On the other hand, Valley National Bank ($VLY) has both a lot of commercial real estate holdings and the highest ratio of commercial real estate exposure to total assets. That’s quite a thing, given today’s economic climate.

How this matters now

We offer the above tables as an example of the research you can conduct, although most of these specific banks might not be all that interesting. Large banks don’t have a high exposure to commercial real estate; the smaller ones (in SIC code 6022, if you must know) typically have more exposure. 

And, of course, these numbers are nearly a year old. As 2023 annual reports arrive in coming weeks, you’ll find the latest numbers on commercial real estate holdings tucked away in the banks’ loan disclosures. You’ll be able to pull that up using our Interactive Disclosures tool. For example, here is the disclosure for Valley National Bank, with the commercial real estate high-lighted in gray:

You can stay informed of when banks’ annual reports arrive by setting up email alerts for the firms you follow. We’ll also revisit commercial real estate from time to time in the next several months, since this concern isn’t likely to go away any time soon.

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