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Fitch: US Banks CRE Exposure at Record, Market Set to Soften
November 7, 2016 / 4:06 PM / a year ago

Fitch: US Banks CRE Exposure at Record, Market Set to Soften

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: U.S. Banks: Trends in CRE Lending here NEW YORK/LONDON, November 07 (Fitch) Commercial real estate (CRE) valuation and lending trends are not sustainable in the medium term and banks should expect a softening of the CRE market, Fitch Ratings says. Falling homeownership rates have helped drive US banks' commercial real estate lending to record levels as property valuations also approach or exceed pre-2008 peaks. The timing and severity of this softening is uncertain and depends on factors including interest rates and overall economic conditions. Some asset quality mean-reversion is factored into our ratings and negative rating action is therefore only likely when banks' losses and nonperforming asset ratios exceed our expectations and those of similarly rated peers. The commercial and industrial segment has seen the strongest growth with a CAGR of 9.7% over the last five years, but CRE lending growth has also been strong with a CAGR of 3.7%, exceeding GDP growth. Multifamily lending has been the main driver within the CRE category, expanding faster than any other major bank loan class and posting a CAGR of 10.7%. Hotel/industrial/retail/office (HIRO) lending has slowed and construction loan balances have declined over the last five years. This is particularly significant because construction loans experienced the highest loss severity in the last crisis and we expect a similar trend in the next downturn. Fitch believes banks have tightened their lending standards for construction, driven by their experience in the last crisis and by subsequent regulations that require them to hold additional capital on loans to highly leveraged construction projects. But there has been a recent expansion in construction lending at some banks that we believe adds to risks, especially considering current CRE market conditions and valuations of completed projects. The risk to credit profiles to be the greatest at smaller banks, as they generally have the highest concentration of CRE exposure, Fitch believes. All of the most concentrated banks - those with more than 300% of risk-based capital in CRE - have less than $50 billion in assets and most have assets below $10 billion. These smaller banks also have varying degrees of sophistication in their risk management practices. Not all small, CRE-concentrated banks are necessarily at risk. The resilient institutions were more selective in their underwriting and reported modest growth into the most recent downturn, or lent against rent-regulated multifamily buildings. A $205 billion wall of maturing loans from CMBS conduits originated in 2006 and 2007 creates the potential for further CRE lending growth through 2017. Given the soft CMBS market and the imminent introduction of rules that require issuers to retain a 5% stake in the CMBS transactions, we expect banks, insurers and other market participants to refinance many of these loans. We will closely monitor the impact on Fitch-rated banks as outsized growth in CRE loans is likely to be credit negative. For more information see the report "U.S. Banks: Trends in CRE Lending" published today and available at or by clicking the link above. We also plan to release three additional reports taking a closer look at the multifamily, HIRO and construction lending segments of the U.S. market. Contact: Johannes Moller Associate Director US Banks +1 646 582-4954 Christopher Wolfe Managing Director US Banks +1 212 908 0771 Simon Kennedy Senior Analyst Fitch Wire +44 20 3530 1387 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: Additional information is available on The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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