These Banks Have High CRE Concentration Article originally posted on Globe St. on June 12, 2024 It is little secret that the market is worried about regional banks that have a high concentration of commercial real estate loans. Moody’s just placed six banks on review for their concentration of loans in this category. And now Pacific Investment Management Co., or Pimcoexpects more regional bank failures in the US because of a “very high” concentration of troubled commercial real estate loans on their books. “The real wave of distress is just starting” for lenders to everything from malls to offices, John Murray, Pimco’s head of global private commercial real estate team, told Bloomberg in an interview. For distress investors this portends possible deals on the horizon. Murray noted that larger banks have been disposing of some of their higher quality assets first to avoid deeper losses. “As stressed loans grow due to maturities, however, we expect that banks will start selling these more challenged loans to reduce their troubled loan exposures,” he said, adding that for the past 18 months Pimco has been purchasing CRE loans offloaded by some large US banks. More worrying news comes from S&P Global Market Intelligence, which just found US community bank earnings are expected to dip 12% year-over-year before rebounding in 2025 and 2026. It predicts that community bank credit quality will slip in 2024 and weaken further in 2025 and 2026, led by higher delinquencies and losses in commercial real estate portfolios, but also says that the deterioration will serve as a hit to earnings rather than a threat to safety and soundness for most institutions. To get a greater sense of which banks could be at risk from their CRE exposure, a recent analysis by a Florida Atlantic University finance expert provides some clarity. It found there are 67 banks in the US that are at increased risk of failure due to their commercial real estate exposures. It evaluated 157 of the largest banks in the US out of over 4,000 existing banks to track their exposure to commercial real estate. Using publicly available quarterly data from the Federal Financial Institutions Examination Council Central Data Repository, it calculated each bank’s total CRE exposure (the sum of CRE nonfarm-nonresidential mortgages, multifamily mortgages, CRE construction loans and unused CRE commitments) as a percentage of the bank’s total equity. Any ratio over 300% is viewed as excessive exposure to CRE, which puts the bank at greater risk of failure.