Bond investors have punished banks with heavy exposure to commercial real estate, potentially adding even more pressure to the lenders’ profits as Wall Street scrambles to assess how widely pain in property debt will spread through the financial system, Bloomberg News reported. Banks with high levels of commercial real estate exposure tend to have bonds that trade at relatively wider spreads, according to an analysis by Barclays Plc credit strategists led by Dominique Toublan. In some cases, spreads on those bonds have been widening, even as investors have broadly piled into financial industry bonds in pursuit of higher-yielding securities. Barclays’ Toublan wrote in an email that commercial real estate-related angst explains about 80% of issuer-level spreads in the U.S. investment-grade debt market, with lenders with lower exposure generally trading tighter. The differentiation in pricing underscores how investors are being selective as they snatch up bonds, a factor that could lift funding costs for banks already under pressure from setting aside money for potential real estate losses. Some of the regional lenders with portfolios weighted toward underperforming commercial real estate markets include Bank OZK, Valley National Bancorp and Webster Financial Corp., according to Morgan Stanley. Barclays says that Webster has commercial real estate exposure equal to more than 250% of its capital. The Stamford, Connecticut-based bank has bonds due 2029 that traded at spreads of nearly 200 basis points, or 2 percentage points. Those spreads have been widening since late January. Read more.
ABI will present a program April 30-May 2 that will address CRE exposure: the 2024 Distressed Real Estate Symposium, to be held in Ojai, Calif. Click here to register!