Losses On Commercial Real Estate Will Be Much, Much Worse Than Expected - Deutsche Bank
Deutsche Bank is out with a pretty dismal report on commercial real estate, saying they estimate that losses from commercial real estate may total $250-$350 billion, more than double the $100 billion in losses assumed by the consensus.
Deutsche Bank said CMBS losses on 2005-2008 vintages will be 12-15%, but losses on commercial bank loans may exceed that. Losses on commercial construction loan may be 25%. This brings the total CRE/construction losses to an estimated $250-$300 billion.
The firm's CMBS team believes cumulative losses on bank loans may exceed that on CMBS for the following reasons: "1) Growth in CMBS was robust in 2005-2007, essentially absorbing the best loans at spreads too narrow for banks to participate. This caused banks (especially community banks) to take on more risk in order to achieve better spreads; 2) Banks tend to focus on transitional properties (i.e. properties with a business plan vs. locked up cash flow)—which tend to suffer more in downturns; 3) A larger portion of banks' commercial real estate was originated at the peak (2005-2007) and since bank loans tend to have 3-5 year maturities, will mature at the trough of the downturn (2011-2012); 4) Over the past few years, delinquency rates on bank commercial real estate have been 2-3x higher than that on CMBS.
Deutsche Bank said while losses on commercial real estate have been widely discussed, they believe losses taken to date at the banks have been relatively modest because lower interest rates allow interest reserves to last another 1-2 years (beyond the typical 2-3 years) and banks have the ability to extend current loans in hopes of riding out the storm.
Deutsche Bank CMBS team believes banks are less than half way through recognizing construction losses and 20% or less for commercial real estate.
Deutsche Bank said banks have $1.7 trillion of loans classified as CRE with $1 trillion in "core" CRE loans and $532b of construction and land development and $150b of multifamily loans.
Of the largest banks, Deutsche Bank said BB&T (NYSE: BBT), Marshall & Ilsley (NYSE: MI) and Zions Bancorp (Nasdaq: ZION) have the largest exposure, while Bank of America (NYSE: BAC), Citigroup, Inc. (NYSE: C) and JPMorgan (NYSE: JPM) have the smallest.
Other banks stocks mentioned in the report include:
- Capital One (NYSE: COF)
- Comerica (NYSE: CMA)
- Fifth Third (Nasdaq: FITB)
- Huntington Bancshares Inc. (Nasdaq: HBAN)
- KeyCorp (NYSE: KEY)
- M&T Bank Corp. (NYSE: MTB)
- PNC (NYSE: PNC)
- Regions (NYSE: RF)
- SunTrust (NYSE: STI)
- Wells Fargo (NYSE: WFC)
- Associated Banc-Corp (Nasdaq: ASBC)
- BOK Financial Corp. (Nasdaq: BOKF)
- City National Corp. (NYSE: CYN)
- Colonial Bancgroup Inc. (NYSE: CNB)
- Cullen/Frost Bankers, Inc. (NYSE: CFR)
- Commerce Bancshares Inc. (Nasdaq: CBSH)
- First Bancorp (NYSE: FBP)
- First Citizens Bancshares Inc. (Nasdaq: FCNCA)
- First Horizon National Corp. (NYSE: FHN)
- Fulton Financial Corp. (Nasdaq: FULT)
- Popular Inc. (Nasdaq: BPOP)
- Synovus Financial Corp. (NYSE: SNV)
- TCF Financial Corporation (NYSE: TCB)
- Webster Financial Corp. (NYSE: WBS)
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