According to the Federal Reserve, major U.S. banks’ commercial real estate portfolios performed better than expected in this year’s annual health checks. The central bank reported a slight decrease in losses compared to the previous year. This outcome provided valuable insight into the exposure of the country’s lenders to declining real estate prices, a concern given the growing risks in the global commercial real estate (CRE) sector. Factors such as rising interest rates and remote work options have adversely affected CRE, particularly office spaces. As economic activity slows down, CRE values in all sectors are anticipated to soften, impacting banks significantly. Moody’s Investors Service noted that banks hold approximately half of the $6 trillion in outstanding CRE debt, with the largest share maturing between 2023 and 2026, according to a report by Thompson Reuters.
The Federal Reserve’s annual bank “stress tests” were designed after the 2007-2009 financial crisis to assess how well lenders would fare under extreme scenarios, such as a 40 percent decline in commercial real estate values. Out of the 23 banks examined, which hold around 20 percent of office and downtown retail CRE loans, it was demonstrated that they could withstand a significant downturn in the CRE market. The Fed stated that the average projected CRE loan loss rate for this group was 8.8 percent of average loan balances, slightly lower than last year’s 9.8 percent. Goldman Sachs Group exhibited the highest CRE loan loss rate at 16 percent of average loan balances, followed by Morgan Stanley at 13.7 percent and Citizens at 12.4 percent. Charles Schwab, which primarily serves retail customers, reported a CRE loss rate of zero.
Although the results indicate a better-than-expected scenario regarding the industry’s exposure to CRE, Federal Reserve officials acknowledged that smaller regional and community banks, which were not included in the tests, hold the majority of bank CRE loans.
Here are the projected loan losses by loan type for the period from Q1 2023 to Q1 2025, under the Federal Reserve’s severely adverse scenario, expressed as a percentage of average loan balances:
- Bank of America Corporation (BAC.N) – 9.4%
- The Bank of New York Mellon Corporation (BK.N) – 9.3%
- Barclays US LLC – 3.4%
- BMO Financial Corp. – 8.3%
- Capital One Financial Corporation (COF.N) – 9.9%
- The Charles Schwab Corporation (SCHW.N) – 0.0%
- Citigroup Inc. (C.N) – 9.3%
- Citizens Financial Group, Inc. (CFG.N) – 12.4%
- Credit Suisse Holdings (USA), Inc. – 8.4%
- DB USA Corporation – 11.2%
- The Goldman Sachs Group, Inc. (GS.N) – 16.0%
- JPMorgan Chase & Co. (JPM.N) – 3.9%
- M&T Bank Corporation (MTB.N) – 8.8%
- Morgan Stanley (MS.N) – 13.7%
- Northern Trust Corporation (NTRS.O) – 11.5%
- The PNC Financial Services Group, Inc. (PNC.N) – 10.0%
- RBC US Group Holdings LLC 2 – 10.3%
- State Street Corporation (STT.N) – 4.1%
- TD Group US Holdings LLC – 7.5%
- Truist Financial Corporation (TFC.N) – 9.6%
- UBS Americas Holding LLC – 4.1%
- U.S. Bancorp (USB.N) – 9.5%
- Wells Fargo & Company (WFC.N) – 9.7%
