Yahoo FinancePimco Warns of More Regional Bank Failures on Property Pain

(Bloomberg) -- Pacific Investment Management Co. expects more regional bank failures in the US because of a “very high” concentration of troubled commercial real estate loans on their books.
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“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, said in an interview. His division sits within Pimco’s $173 billion alternatives business.
Uncertainty over when the Federal Reserve may cut interest rates has exacerbated challenges faced by the CRE sector, where high borrowing costs have hammered valuations and triggered defaults, leaving lenders stuck with assets that are tough to sell. Contrary to some market expectations, larger banks have been disposing of some of their higher quality assets first to avoid deeper losses, according to Murray.
“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 his team has been snapping up CRE loans offloaded by some large US banks for the past 18 months.
The turmoil has been particularly felt among regional banks, which boosted their CRE exposure that in many cases is now worth only a fraction of their value at their peak. Smaller banks have also continued to worry investors ever since the collapse of a few last year.
Earlier this year, New York Community Bancorp shocked investors by slashing its dividend and stockpiling more cash for potentially bad loans, sending shares into a tailspin that ended in a capital injection. US Bancorp, the largest regional bank by assets, increased its provisions for credit losses in the first quarter. Shares of Axos Financial Inc. slumped last week after a short seller took aim at what it called the bank’s “glaring” property loan problems.
Regional banks were also the only lenders that didn’t demand extra down payments from commercial-property borrowers in recent years, highlighting their vulnerability to falling values, according to a report released by MSCI Real Assets in March. Deposit-taking institutions face an estimated $441 billion wall of maturing property debt this year.
For larger banks, the property exposures aren’t expected to cause systemic failures as their CRE lending was curbed after the 2008 crisis, Murray said. But borrowers’ failure to repay means they’re lending even less compared with 2021 and 2022, he added.