Smaller-sized U.S. banks will be hardest hit by their exposure to commercial real estate loans, and many of those banks will collapse, Moody’s Investors Service said in a report released last Thursday.
A large number of smaller-sized banks, which are not rated by Moody’s, make up only 15 percent of U.S. bank system assets but carry 50 percent of commercial real estate loans outstanding, and will struggle under the weight of that exposure, Moody’s said.
While the cost of small bank failures “will inevitably be borne by the entire banking system,” they are not likely to trigger more ratings downgrades beyond what has already been done, Moody’s said.
Moody’s estimates that larger rated U.S. banks hold 50 percent of loans and will incur losses from those loans of $120 billion. The amount represents a loss rate of about 17 percent on the banks’ year-end 2007 commercial real estate loan balances.The total remaining losses on commercial real estate exposure for both rated and unrated banks could exceed $150 billion, Moody’s said.
Moody’s said it expects commercial property prices will ultimately fall between 45 and 55 percent from their 2007 peak.
Even banks that do manage to hang on through the current recession despite a high exposure to commercial real estate loans may still eventually face collapse, Moody’s said.
Another ratings agency, Standard & Poor’s, said earlier this week the worst may not be over for commercial real estate loans as vacancies remain high and rents decline.