Predicted Defaults to Bring Hard Times for Some Banks

Commercial mortgage defaults will be highly elevated in 2010 and could wipe out profits at a number of U.S. banks, but it does not appear that this problem will morph into a true crisis that would endanger U.S. or global financial systems, an SMR Research Corp. study concludes. According to “The Commercial Mortgage Dilemma: Banking’s Next Credit Challenge,” the saving grace for the financial system is that most really large U.S. banks are modestly exposed.
For example, highly delinquent commercial mortgages recently were only 0.1 percent of Citigroup’s assets. JP Morgan Chase also appears to be exempt from the dilemma, and exposure at Bank of America is just slightly higher. None of the nation’s largest banks risk failure due to commercial mortgage defaults, the SMR study noted.

However, some medium-sized and smaller banks are suffering. At small banks with less than $1 billion of assets, commercial mortgages recently were 32.5 percent of total assets--a level of dependence six-fold higher than at big banks with $50 billion or more of assets. As of September 30, 2009, 154 banks had highly delinquent commercial mortgages equal to 3 percent or more of their total assets. (In a reasonably good year, banks earn profits of only about 1 percent of assets.) Many of these institutions will be hard-pressed to make any money in 2010, the SMR report stated, and some could become insolvent.

As of late 2009, the 90-day-plus delinquency rate on all commercial mortgages was rising fast. It reached 5.59 percent on September 30, up from 3.51 percent just six months earlier. The total commercial mortgage loan market was $3.4 trillion as of the third quarter of 2009. Despite this, SMR is cautiously optimistic, citing low foreclosure rates at churches, medical buildings, funeral homes, and private schools as a positive sign.