In a week that brought a fresh warning on commercial real estate risks from Federal Reserve Chair Jerome Powell, regional bank executives from Citizens Bank, Fifth Third Bank and KeyBank asserted that their business models limited their exposure to the sector.
Ring-fenced management of the pressured office category and diversified portfolios that aren’t overly exposed to concentrated asset classes or geographies were among the factors that buffer CRE risk, according to bank presentations at the RBC Capital Markets Financial Institutions Conference from March 5-6 in New York.
Powell on Wednesday said losses in the CRE market will harm small- to medium-sized banks.
Cleveland, Ohio-based KeyBank CFO Clark Khayat highlighted the bank’s approach to managing risk for the multi-family category.
“We tend to work with experienced operators [in multi-family] who are not particularly aggressive, they're not trying to lever up, we're underwriting fairly conservatively,” said Khayat during the RBC conference. “They tend to put a lot of equity in [and] we don't put a lot of positions beneath the senior debt, so it's a pretty clean capital stack,” he added, noting that the bank is comfortable with performance.
For KeyBank, a lender with $188 billion in assets, non-owner occupied CRE amounts to 13% of total loans, as compared to an average of 17% among regional bank peers, according to a recent presentation. He acknowledged that the office sector, which amounts to less than 1% of Key’s CRE portfolio, is facing some headwinds.
“We're seeing some stress in that book like everybody else, but that's just not a place historically where we think we've had as much strength,” Khayat said, referencing lower occupancy rates.
Office a ‘medium-term problem’: Citizens Bank
Providence, Rhode Island-based Citizens Bank maintains an office portfolio valued at $3.6 billion, down 3% quarter over quarter driven by paydowns and charge-offs, per the bank’s fourth quarter earnings presentation. The $222 billion-asset bank allocated 10.2% of its office portfolio as a loan loss reserve, a set-aside amount for a worst-case situation, according to Richard Stein, Citizens chief risk officer.
“That's a scenario that looks like the great financial crisis,” said Stein. “You just have to understand that general office is going to be a medium-term problem,” he added, noting that he expects the office sector, from a loss and charge-off standpoint, to be a problem through 2024 and into 2025, peaking at the end of 2024.
Citizens, he said, anticipated pressures on the office category in the fall of 2022 when interest rates started to rise and return-to-office plans were getting implemented. Ensuring the buildings are full is the key to ensuring stability. (Citizens office portfolio, he noted, is 70% suburban.)
“If that means a little concession here or there to ensure that lease gets extended, or the borrower has some money to do some tenant improvements to extend leases, that’s what we're doing,” he said.
Not a regional banking crisis: Fifth Third Bank
Although Cincinnati-based Fifth Third has experienced zero net charge-offs in its CRE portfolio, CEO Tim Spence noted it was keeping an eye on its borrowers.
“We will continue to assess forward-looking client vulnerabilities based on firm-specific and industry trends and closely monitor exposures where inflation and higher rates may cause stress,” Spence said at the conference. “These practices have enabled us to engage customers early in constructive dialogue and proactively manage thes credit risk in our portfolio.”
As a percentage of Fifth Third’s total loan portfolio, 14% were commercial real estate loans, according to the bank’s conference presentation, which Spence noted was the lowest in its peer group.
But Spence pushed back against a darker view of the regional banking sector.
“Fifth Third is declaring war on the term regional banking crisis,” he said. “The lesson that we relearn every 15 years as an industry is it’s really bad to allow any part of your balance sheet to become overly concentrated in one place.”
