Commercial mortgage portfolios could be weak spot in COVID-19 banking era

by Phil Hall20 Mar 2020

The nation’s banking system major banks are still stable and resilient in the face of the COVID-19 pandemic, according to a new study from Kroll Bond Rating Agency (KBRA). However, their commercial mortgage portfolio could be a weak link in their financial health.

KBRA noted that exposure to “higher risk lending categories such as hotels, retail centers, and restaurants are generally small-to-moderate portions of loan portfolios. Those with larger-than-average exposures to hotels typically have relatively conservative loan-to-values and debt service coverage combined with management expertise in the sector.”

KBRA stated that it was monitoring the banks with outsized exposure in the retail and hospitality industries and “will take appropriate rating action as needed. In addition, commercial real estate projects that rely on retail traffic to restaurants, malls, strip centers, fitness centers, movie theaters, among others, to help drive sales or leases are potentially vulnerable.”

In comparison, KBRA forecasted that “banks with sizeable residential mortgage operations and/or fee generating capacity to be relatively more resilient.” KBRA added that low mortgage rates and high refinancing volumes will likely benefit banks in this market for at least the first half of this year and possibly beyond.

On the whole, KBRA praised the banking industry for learning lessons from the 2008 crash and being in a stronger position to face a bold new challenge.

“Solid financial metrics provide a strong starting point going into this economically uncertain period,” the report stated. “Profitability and capitalization remain sound, while problem loans have hovered around multiyear lows.”

KBRA added that while the nation’s major banks “are exposed to a potential broad-based impact in which consumer and commercial confidence is negatively affected and the economy slows meaningfully,” they will ready to deal with a pandemic-disrupted economy.

“Under this scenario, problem loans could grow considerably from a very low base yet remain manageable in the context of core earnings, reserves, and capital,” the report continued. “Importantly, tangible common equity levels are managed at much higher levels than before the 2008 financial crisis.”