Fitch: Small Banks Increase CRE Lending

Michael Tucker

April 04, 2019

Small banks are gaining market share in commercial real estate lending. This could be worrisome given loss histories, especially construction lending losses, said Fitch Ratings, New York.

Banks with less than $100 billion in assets have gained commercial real estate lending market share ever since the Great Recession. This is especially true for banks with between $10 billion and $100 billion in assets, which have reported nearly 12 percent average growth per year over the last decade.

"The big banks have started to pull back in commercial real estate and smaller banks that may not have the size and diversity to absorb commercial real estate losses in a downturn have filled the void," said Fitch Ratings Associate Director Johannes Moller. He said Fitch expects to see some loss reversion of commercial real estate and views bank loan growth in commercial real estate that is not supported by market fundamentals or is well in excess of in-market peers as credit negative.

Though larger banks with more than $100 billion in assets have pulled back their commercial real estate lending, overall commercial real estate lending growth remains above average, Fitch noted. "After coming off recent highs and despite a pullback by some of the larger banks, average growth in commercial real estate lending for all U.S. banks remained strong," the firm's Diverging Appetites for CRE Lending Among U.S. Banks report said. Bank lending on commercial real estate assets increased more than 5 percent last year, higher than the banking industry's 4.3 percent year-over-year loan growth on other assets.

Higher short-term interest rates and a flattening Treasury curve have coincided with tighter credit spreads in commercial real estate loans due to increased competition from non-bank lenders, Fitch said. "These factors in combination have reduced risk-adjusted returns," the report said.

Larger banks tend to have more diversified business models than small banks, giving larger banks less balance sheet concentration and greater flexibility to react to changing market conditions, Moller noted. "A modest downturn in commercial real estate should be manageable for the larger banks, however, some smaller concentrated banks may not fare as well," he said.

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