U.S. regional banks face commercial real estate risk

NEW YORK (Reuters) - U.S. regional banks face greater exposure to losses due to commercial real estate loans, which may increase their chance of future ratings downgrades, Fitch Ratings said on Monday.

While the overall U.S. banking industry faces exposure to CRE losses, the risk is "generally manageable" for the largest financial institutions, Fitch said in a report.

Fitch expects that any rating actions will be concentrated among the regional mid-sized to smaller banks, and any potential rating cuts will be no more than one notch. Still, more significant downgrades are "possible," Fitch said.

"The potential for further deteriorations in commercial real estate portfolios is a major contributor to Fitch's negative outlook for the banking sector," said Thomas Abruzzo, co-head of Fitch's North America financial institutions group.

"Loan losses are increasingly likely given the expectation for ongoing declines in commercial real estate markets," he said in the report.

Other key findings of Fitch's report include potential aggregate impairments under Fitch's base scenario of between $120 billion and $140 billion for Fitch-rated banks and thrifts.

Fitch estimated a potential loss rate of between 11 percent to 24 percent of total CRE loans held by companies rated by Fitch.

As of June 30, U.S. banks had about $1.1 trillion of CRE loans, roughly half of which were held by banks in Fitch's rated universe.

Fitch estimates that 10 percent of this balance is exposed to potential impairment. These figures do not include the approximately $500 billion in construction loans, including residential construction, that are subject to even greater risk.

(Reporting by Walden Siew; Editing by Leslie Adler)