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Bank losses revive fears over US commercial property market

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Mounting losses from banks in the US, Asia and Europe have rekindled concerns about weakness in the US commercial property market, a sector that has been under pressure from lower occupancy levels and higher interest rates. 

Regional US lender New York Community Bancorp revealed on Wednesday that it had taken large losses on loans tied to commercial property, while Japan’s Aozora Bank and Deutsche Bank warned on Thursday about the risks from their exposure to US real estate. 

The losses mark the latest fallout from the US commercial property market’s dual problems of fewer people working in offices since the pandemic and more expensive borrowing costs. 

“We expect evidence of distress to ramp up this year as loan extensions end,” said Kiran Raichura, deputy chief property economist at Capital Economics. “Many borrowers will be forced to either inject new capital, return assets to lenders or sell into a soft market.”

NYCB, whose share price soared last year after it scooped up the collapsed Signature Bank at the height of the crisis among US regional lenders, said on Wednesday it had taken $185mn in losses on just two property loans and set aside more than $500mn to cover potential loan losses.  

The revelations shocked investors, sending NYCB’s stock down almost 40 per cent to wipe out its gains since its takeover of Signature. The pressure continued on Thursday, with the stock down a further 14 per cent in early New York trading. 

The fallout from NYCB weighed on other regional bank stocks, a sector that has still not fully recovered from the collapse of Silicon Valley Bank and other mid-sized lenders last year.

Banking analysts said NYCB’s poor results had resulted from factors particular to the lender — especially its move to a higher classification in regulatory oversight because of its larger scale following the Signature acquisition — but cautioned that it still served as a reminder of the worries around real estate.

Bank of America analysts wrote in a note that higher losses tied to commercial real estate office exposure “are a reminder of ongoing credit normalisation that we are likely to witness across the industry”.

The ripple effects were felt in Tokyo, where shares in Aozora crashed by their maximum limit on Thursday after it forecast a full-year loss on overseas real estate loans and warned that it would take as much as two years for the US office market to stabilise. 

Aozora, a mid-sized lender, revised down its previous forecast for a profit of ¥24bn ($164mn) for the financial year ending in March to a net loss of ¥28bn. The profit warning triggered a drop of more than 21 per cent in the bank’s shares, which had been trading close to a five-year high ahead of the announcement.

Deutsche Bank, meanwhile, also lifted provisions for losses on loans linked to US commercial real estate to €123mn, from just €26mn a year before.

The worries around real estate are not limited to the US. Switzerland’s Julius Baer reported a more than 50 per cent drop in its profits on Thursday after it wrote off SFr606mn ($700mn) from its exposure to the crisis-hit Signa property group. The losses were steep enough to result in the departure of chief executive Philipp Rickenbacher.

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