The looming wave of maturing commercial real estate loans has investors on edge, with many avoiding bank stocks with high concentrations of commercial real estate (CRE) exposure. However, this metric may overlook banks that have riskier loans despite having lower concentrations of CRE. Investors may need to take a more detailed look at the types of loans banks hold to truly assess the risk they are facing.
Around 30% of outstanding CRE debt is set to mature between 2024 and 2026, which could lead to escalating debt payments for property owners due to rising interest rates. This could push some borrowers to default on their loans as the economic outlook for many office properties has declined. The fear of default risk is already impacting bank stocks, especially in the face of higher interest rates.
While troubled loans are currently contained, there is a growing concern about the rising number of real estate loans past due or in nonaccrual status. The Federal Deposit Insurance Corp. reported a 9% increase in these loans from the fourth quarter of 2023 to the first quarter of the following year, marking the highest level in over a decade.
Interestingly, banks with more than $250 billion in assets are experiencing an acceleration in past due loans despite having lower CRE concentrations. This trend may reflect exposure to large, high-profile office properties in major metropolitan areas, which have been significantly impacted by the pandemic and changes in office space needs.
Analysts suggest that investors should not solely focus on CRE concentrations when evaluating bank stocks. Instead, they should consider factors such as the average loan size, exposure to interest rates, and asset classes to gauge the true risk. Community banks may prove to be less risky than their CRE exposure figures indicate.
Amidst the uncertainty, analysts have identified top stock picks including NBT Bancorp, Webster Financial, and Valley National Bancorp. These banks have shown resilience despite challenges in the market and benefit from strong management teams. While New York City real estate markets face difficulties, these banks have managed to hold their ground.
For larger banks, the sentiment may be improving, with the chance of a turnaround in net interest income and investment banking business. Banks like Citizens Financial Group and KeyCorp are gaining traction among investors, offering potential for growth despite the challenging market conditions. Financial-only investors are showing increased interest in these stocks.
The metric of commercial real estate concentrations is not the only factor investors should consider when evaluating bank stocks. A deeper assessment of asset quality, past due loans, and exposure to risk factors is essential to truly understand the potential risks and opportunities in the market. By taking a granular approach to analyzing bank stocks, investors can better position themselves to navigate the challenges posed by maturing commercial real estate loans.