Assessing CRE Credit Risk in Bank Loan Portfolios Globally: Better Disclosures Would be Applauded

DBRS, Inc. (DBRS Morningstar) published a commentary highlighting the factors that influence the assessment of commercial real estate (CRE) credit risk in loan portfolios. CRE lending is more cyclical and volatile than other types of lending, as evidenced by the significant amount of crises experienced over the past several decades, which resulted in a large number of bank failures. Consistent with historical trends and given the nature of the current coronavirus-driven downturn, we expect banks with high concentrations of CRE will be more vulnerable to the economic fallout than those with more diversified loan portfolios.

Key highlights include:

-- The inherent risks and loss potential in a CRE portfolio are determined more by loan composition and underwriting standards than aggregate size since the various loan types that make up the portfolio have different default probability and loss-given default characteristics.
-- Since the financial crisis, CRE loan growth has been substantial, driven in part by the low interest rate environment. Moreover, the composition of banks' CRE portfolios has generally shifted toward lower risk nonresidential commercial and multifamily loans and away from construction and development.
-- Analyzing the financial fundamentals of a bank with exposure to CRE involves an analysis of both the quantitative components and qualitative characteristics of the portfolio.

“The impact from the global pandemic further intensifies the need for increased disclosures globally, as certain CRE sectors have been more severely affected than others. For example, shutdowns, travel restrictions and social distancing measures have had an outsized impact in retail and hotels. Going forward, we would like to see broader participation from banks globally in providing the necessary information in order to appropriately assess the risks in their CRE loan portfolios,” said Michael McTamney, Vice President.

Notes:
The commentary is available at www.dbrsmorningstar.com.

For more information, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277