February 4, 2010 / 8:46 PM / 9 years ago

Commercial property loans to hit small banks-Moody's

NEW YORK, Feb 4 (Reuters) - 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 on 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 total commercial real estate loans and will incur losses from those loans of $120 billion from 2008 through 2011. The amount represents a loss rate of about 17 percent on the banks’ year-end 2007 commercial real estate loan balances.

“So far, Moody’s rated banks have incurred $43 billion of commercial real estate losses through charge-offs and purchase accounting marks, leaving $77 billion — or close to 65 percent of our estimate — to be taken in the fourth quarter of 2009 and all of 2010 and 2011,” Moody’s assistant vice president Joseph Pucella said in a statement.

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.

“Such institutions could find themselves with diminished franchises after the recession because commercial real estate lending opportunities and the associated revenue have dried up,” Pucella said. That could have major implications for the sustainability of their business models, he 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.

S&P said in a report it already has negative outlooks on about 75 percent of rated banks with the largest commercial real estate exposures, indicating they are at risk of a downgrade. For details see [ID:nN01206712]. (Reporting by Chris Reese; Editing by Diane Craft)

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