S&P Downgrades Outlook On 5 Regional Banks, Citing CRE Exposure

office towers file image pixels

S&P Global downgraded five regional banks Tuesday to a “negative” outlook from “stable” because of their exposure to CRE loans. The banks include First Commonwealth Financial, M&T Bank, Synovus Financial, Trustmark and Valley National Bancorp.

"The negative outlook revisions reflect the possibility that stress in CRE markets may hurt the asset quality and performance of the five banks, which have some of the highest exposures to CRE loans among banks we rate," the ratings agency said.

A negative outlook, in S&P parlance, means that a rating might be lowered in the near term, but that is not a certainty.

In the case of the five banks, the ratings agency didn't lower their ratings at this time, which are in the BBB range. This means the banks have adequate capacity to meet their financial commitments, but that could change given adverse economic conditions.

CRE loans comprised roughly 25% and 55% of the loans of each of these banks as of the end of 2023, S&P noted, and “well exceeded their Tier 1 capital, in some cases by several multiples.”

The banks have high exposure to office-associated loans, and office is the riskiest property sector. They also are exposed to multifamily-associated loans, which S&P says has its own set of risks, namely price pressures due to higher interest rates.

Though S&P downgraded the banks' outlook, the ratings agency also noted that they haven't experienced sharp rises in delinquent loans. The CRE loans held by these banks mostly had conservative loan-to-value and debt-service coverage ratios, according to S&P.

“If the Federal Reserve pivots to lowering interest rates, which could happen as early as midyear, we believe that could also help alleviate some of the cumulative stress in the CRE sector,” S&P said.

That, however, isn't a sure thing, with the outlook revisions reflecting the potential risk that interest rates could stay higher for longer than the market currently anticipates.

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