Failing loans for commercial real estate threaten small banks

ByABC News
September 9, 2009, 10:15 PM

— -- Bank stocks have roared back from a near-death experience, which might be diverting attention from a new threat looming for the industry: commercial real estate.

The speed at which loans on commercial properties such as office buildings and malls are souring is "unprecedented," a recent report from Deutsche Bank said. The delinquency rates on these loans reached 4.1% in June, more than double the March rate. Banks are most vulnerable because they hold about $1 trillion of commercial real estate loans and an additional $530 billion in construction loans.

Job losses have led to rising office vacancies. Tight-fisted consumers have helped close retailers such as Circuit City, forcing mall landlords to default on loans. That is having a tiered effect on the banking industry:

It is especially noxious for the smallest banks, which have very large portions of their loan portfolios exposed. That's the chief reason bank failures have hit 89 this year, vs. 25 for all of last year. For instance, one of the latest banks to fail, Affinity Bank, had 46% of its $805 million in loans to commercial properties. That compares with 33% for all banks, says Keefe Bruyette & Woods.

Regional banks are also highly exposed and are a bigger worry for the economy because many are large. United Commercial of San Francisco is first on the "top potential concerns" list of Barclays Capital research. The bank, with assets of $12.7 billion, missed a regulatory deadline for filing its second-quarter report and is restating its 2008 financial statements. Tuesday, it named a new CEO. United Commercial wouldn't comment.

The very largest banks, those with at least $1 trillion in assets, are less exposed. JPMorgan Chase has about 5.4% of such loans, and Citigroup has 3.4%, according to government filings. Among them, Wells Fargo has the largest exposure, with about 16.5%of its $821 billion loan portfolio made up of commercial mortgages or construction loans.