Ratings agency Moody's said it is placing six regional U.S. banks under review for a ratings downgrade on their debt because of their substantial exposure to commercial real estate loans.
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The ratings provider placed First Merchants Corp., F.N.B. Corp., Fulton Financial Corp., Old National Bancorp, Peapack-Gladstone Financial Corp. and WaFd Bank on review for a downgrade, Bloomberg reports. The regional banks have a sizable amount of CRE loans on properties staring down profitability pressures and declining asset quality, while heightened interest rates are increasing long-term risks, Moody's said.
Many regional banks doubled down on CRE during the low-interest-rate climate prior to rate hikes from the Fed, building and maintaining substantial exposure to a “volatile asset class,” Moody's said in a statement. Regional banks with exposure to the sector have come under scrutiny by investors after a regional bank stock sell-off earlier this year triggered by New York Community Bancorp, CNBC reported.
The percentage of nonperforming CRE loans in U.S. banks' portfolios doubled to 0.81% at the end of 2023, up from 0.4% in 2022, according to the International Monetary Fund's semi-annual Global Financial Stability report.
Banks are allocating more funds to cover potential losses from bad CRE loans, the IMF said in its report.
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