Commercial loan performance is all over the map in the pandemic era

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The performance of commercial loans at US banks is starting to differ, with some lenders – especially those targeting industries hard hit by the pandemic – reporting increased levels of problem loans and others showing significant improvements in credit quality.

The different paths became apparent in the second quarter results as companies like energy-focused Comerica reported a decline in criticized credit, while M&T Bank, which is involved in the hospitality industry, nearly doubled its bad loans over the past year.

M & T’s $ 150.6 billion asset said Wednesday that certain parts of its loan portfolio – namely the hospitality and healthcare sectors – are recovering more slowly from the pandemic-induced recession than others. The credit issues concerned Frank Schiraldi, an analyst at Piper Sandler.

“I think in an area like hospitality, cash flows would improve when the economy opened up again,” he said in an interview. “The salvation is that they don’t expect any significant loss on these loans.”

As of June 30, M & T’s non-accrual loans were $ 2.2 billion, an increase of 93.8% over the same quarter in 2020 and 2.31% of the company’s outstanding loans at the end of the quarter.

The company expects to announce an increase in criticized credit in an upcoming securities filing, CFO Darren King told analysts on Wednesday M & T’s conference call.

M&T has a large commercial property portfolio that contains most of the criticized assets. In addition to monitoring the cash flows of every property in trouble, M&T continues to receive updated ratings for each location, which helps the bank better keep track of property ratings, King said.

“The question, of course, will be when cash flows will reach a point where we see them as no longer being criticized,” said King. “We are seeing improvements in the occupancy of the hotel portfolio throughout the hotel portfolio, but we are not quite at the pre-pandemic level there, mainly because business trips were not resumed.”

Another company that saw an increase in non-accrued loans in the second quarter was Signature Bank. The New York-based bank is almost entirely a commercial lender, with commercial real estate loans accounting for about half of its total portfolio and commercial and industrial loans accounting for the majority of the rest.

Signature reported that $ 136.1 million in loans were not accrued compared to $ 133.7 million in the first quarter and $ 46.9 million in the second quarter of 2020.

CEO Joseph DePaolo praised Signature’s efforts to reduce its focus on commercial real estate loans during the company’s conference call on Tuesday, but also said, “Our overdue loans remain in the normal range.”

At Zions Bancorp, based in Salt Lake City, executives cited commercial real estate lending as an area they are carefully monitoring, even if there have been no signs of serious distress.

During the second quarter, Zions commercial rental properties were $ 28 million, compared to $ 31 million in the previous two quarters and $ 23 million a year ago.

“There are still many risks in the world, although we do not see any losses today,” said Chairman and CEO Harris Simmon on a conference call Monday.

Across the industry, however, the picture remains bleak as some banks report strong commercial mortgage payment trends. One reason for the inequality, along with the variable impact of the pandemic on different types of commercial property, could be how different banks classify their loans.

“Critical assets of one bank may not be criticized assets of another bank,” said Schiraldi of Piper Sandler.

At Berkshire Hills Bancorp, based in Massachusetts, net commercial real estate loan write-offs were $ 2.3 million in the second quarter, 80% less than in the fourth quarter of 2020, when it was $ 11.8 million.

For the Pittsburgh-based PNC Financial Services Group, distressed commercial real estate debt fell to $ 218 million for the second straight quarter, 1.3 percent less than in the previous three months, although it was still well above $ 43 million -Dollars of the same period last year.

San Francisco-based Wells Fargo reported $ 5 million in net returns from commercial real estate loans in the second quarter, compared to $ 46 million in net write-offs in the previous quarter and $ 162 million in losses two quarters earlier.

The outlook for commercial real estate has continued to improve, with the reopening of the economy notably helping to improve cash flows between retailers and hotels, CFO Mike Santomassimo told analysts last week.

Office loan losses were “very small”, but the $ 1.9 trillion Wells Fargo asset continues to monitor the sector to see how changes in home work models affect loan quality said Santmassimo.

Commercial lending trends were also positive in Comerica, where NPLs fell to levels last seen before the COVID-19 pandemic. Dallas Bank’s energy customers have benefited from higher oil prices.

Commercial real estate loans, which have been rated as criticized by Comerica, fell 15% from their high in the third quarter of last year to around $ 97 million. Only 18% of Comerica’s commercial property portfolio is tied to retail and office buildings, which have been particularly hard hit by the pandemic.

Business loans reported as non-accrual at Comerica, including commercial mortgages, declined to $ 256 million for the second straight quarter, down 9.5% from a high of $ 283 million late last year . But its non-accrued business loans were still above the $ 222 million the bank had posted for the same period a year ago.

Overall, the $ 88.3 billion asset bank reported just over $ 2.1 billion in criticized loans, which are often arrears and are considered dubious to avoid a loss. The grand total was below the high of more than $ 3.4 billion in the third quarter of last year and below the $ 2.4 billion in the second quarter of 2020.

Credit enhancement at Comerica encompassed different categories of commercial loans. Troubled energy loans totaled $ 223 million in the second quarter, a decrease of nearly 73% from the $ 822 million reported the previous year when the on-site protection contracts went into effect and the demand for oil collapsed.

Despite the surge in oil prices, Comerica will likely still be cautious about the often volatile industry. “The underwriting is likely to be more conservative than it has been in years past,” said Peter Sefzik, executive director of Comerica’s commercial bank, on Wednesday during the company’s conference call.


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