Saturday, October 29, 2011

What the Big Banks and Bankers are saying about our economy & CRE

There was good news and bad news in the latest flurry of bank earnings reports when it comes to their willingness to fund commercial real estate. The good news: they are showing a renewed interest in CRE loans. The bad news: they are probably not interested in most of the deals for which borrowers need financing.



Banks are reporting continued acquisition of bulk performing and nonperforming loan portfolios from other banks, particularly if the FDIC is willing to share on some of the losses going forward.

For more information on Houston office space, Houston retail space or Houston warehouse space and Houston industrial space, please call 713 782-0260 or see my web site at : www.houstonrealtyadvisors.com Thank you for your interest.




Thanks,

Ed A. Ayres

Houston Realty Advisors, Inc.

Mitaquye oyasin





Banks are also reporting an appetite for lending on New York City and Washington, DC, deals.



Banks are reporting renewed lending to their existing customers who have survived the last four years.



And like the rest of the investment markets, banks are willing to lend on single-tenant owner-occupied properties.



The most new risk banks seem willing to take on now is for multifamily property deals, but even there, the interest seems moderate as banks are still in the "sticking their toes in the water" mode.



Outside of those limited criteria, banks' appetite for commercial real estate lending is only slightly improved from where it was one or two years ago -- and maybe not as good as it was in the first half of 2011, according to Mark Fitzgerald, a debt strategist for CoStar Group.



"I think CRE lenders have pulled back from earlier this year," Fitzgerald said. "CMBS new issuance is pretty much dormant again, banks have pulled back, life insurers continue to lend but are nearing their annual allocations after significant activity in the first half of 2011."



Going forward, the picture doesn't look much better.



"The downward pressure on net interest margins from Operation Twist and low long-term rates will also hurt bank profitability in the near term, which means less room to dispose of legacy loans/make new loans," Fitzgerald said.



Steve Miller, director of U.S. debt and risk research for CoStar Group, said, "I would add that based on some anecdotal discussions, in selected products/markets for the "right" borrower, the largest banks and some of the re-capitalized mid-tier banks are putting out CRE loans. Apartment construction, for one, seems to be the flavor of the day."



"However," Miller added, "the data doesn't really show an upturn - it probably won't for a while, we're in a de-leveraging environment and banks would like nothing better than to have underwater loans go away. They just can't sell enough of their underwater loans at prices that make sense, given their capital condition and earnings capacity, to turnover their portfolios fast enough."



Low Demand May Be Driving Low Liquidity

According to the Federal Reserve Board's monthly survey of economic conditions (Beige Book), banking and finance financial activity was reported to have weakened some since the summer.



Dallas bankers noted that the improvement in financial conditions had stalled, and Chicago bankers indicated a further tightening of credit conditions, particularly for financial firms. In addition, New York bankers reported noticeably weaker activity in the securities industry. Loan volumes were either flat or down slightly in most Districts.



That said, several districts indicated that strong competition among banks for high quality borrowers was leading to lower rates and fees for these customers.



New York bankers' responses suggested increased demand for residential and commercial mortgages but mostly residential refinancing activity. Respondents reported a decrease in spreads of loan rates over costs of funds for all loan categories--especially commercial mortgages.



Philadelphia bankers reported that commercial real estate contacts continued to plan for slow growth due to increased economic uncertainty,



Several commercial bankers in Virginia and Maryland reported moderate increases in loan demand in recent weeks, although some of the increase was from refinancing. One banker attributed an increase in loan applications to businesses shopping around to establish new bank relationships. Also, a lending officer in Richmond reported a sharp increase in loans to existing customers, because new products were now available and the approval process was faster.



In Atlanta banking contacts indicated continued weak loan demand.



Chicago credit conditions tightened further as volatility in financial markets remained elevated and increased risks coming from Europe and the weakness in U.S. economic activity. Most lending activity was still in the form of refinancing, which picked up with lower long-term interest rates.



In Kansas City and Dallas, bankers reported demand for commercial and residential real estate loans was marginally weaker and banks showed more caution in supplying loans to anyone but the most creditworthy of borrowers.



What follows are the comments we heard from bank executives during bank earnings conference calls this past week.



Sticking To Those We Know

"There are lots of opportunities to help our existing customers to refinance their existing loans as they buy new property as we can provide capital to them and then also as the CMBS market continues to mature and refinancers opportunities there. So, overall the commercial real estate business and the risk adjusted returns there are pretty attractive."

Timothy J. Sloan, Senior Executive Vice President and CFO, Wells Fargo & Co.



"There are selective opportunities with clients that we know very, very well, who have market opportunities that arise from the volatility or the down tick or whatever you want to call it in the market place itself. Some of it comes from other lender distress."

Betsy Zubrow Cohen, CEO, The Bancorp



"What we're doing is spending a good amount of time looking at a commercial real estate portfolio and really looking at it in a risk-based basis. And I hate to paint all commercial real estate with a really broad brush and say we don't want it as part of our portfolio. That's far from the truth. And I think in all reality, you'll still see commercial real estate being a significant part of our portfolio for a long time. It's really -- it's pruning the high-risk assets off and trying to partner with those that have successful real estate projects and keeping those as part of a community banks portfolio."

Robert B. Kaminski, COO, Executive Vice President, Mercantile Bank



"Our commercial real estate loan portfolio increased $51.6 million or 13% on an annualized basis. The growth was spread fairly evenly across a number of different property types. We saw a few more attractive refinancing opportunities this quarter in our CRE portfolio that we made an effort to retain, which partially contributed to the lower level of natural runoff than we experienced."

Alvin D. Kang, CEO, Nara Bancorp Inc.



Payoffs, Foreclosures Offsetting Increased Lending

"Average total loans were essentially unchanged at $11.9 billion. Increases in commercial mortgages, residential mortgages and commercial loans were offset by continued decline in the construction portfolio."

Charles J. Nugent, CFO and Senior Executive Vice President, Fulton Financial



"On the CRE side, modest growth in commercial mortgage activity will continue to be masked by the net contraction in construction lending, particularly residential construction from our acquired portfolios."

René F. Jones, CFO, Executive Vice President, M&T Bank



CRE lending "will stay lumpy going forward, but it's on an overall downward trajectory. I mean, the overall construction book continues to decline. I think it's down 20% approximately year-over-year."

P. W. Parker, Chief Credit Officer and Executive Vice President, U.S. Bancorp



"We saw a continued run-off in the commercial mortgage and commercial construction books. Average CRE balances were down $510 million or 4% sequentially. We continue to expect run-off in these portfolios in the near to intermediate term, although at a steadily slowing pace. I would expect that the size of this portfolio will plateau with the stabilization improvement in commercial real estate markets perhaps in the next several quarters."

Daniel T. Poston, Executive Vice President and CFO, Fifth Third Bancorp



"We're still going to see some continued runoff in non-owner-occupied just for no other reason that we really aren't out looking for any of the non-owner-occupied during this downturn."

Michael H. Price, Chairman, CEO and President, Mercantile Bank



Multi Lenders for Multifamily

"We continue to operate in a challenging environment; economic growth remains weak, unemployment stubbornly remains elevated and home values continue to remain soft. In addition, the implementation of Operation Twist by the Federal Reserve has contributed to a flattening of the U.S. Treasury yield curve, putting further downward pressure on long term interest rates and current mortgage product offerings, as well as increasing mortgage loan prepayments. However, we are optimistic that the increase in our loan pipeline, coupled with the reduction in the expanded conforming loan limits that commenced Oct. 1, 2011, and the resumption of multifamily/commercial real estate lending, should facilitate modest loan and balance sheet growth in the fourth quarter and more robust growth in 2012."

Monte N. Redman, President and CEO of Astoria Financial Corp.



"We believe there is a long-term sea change in terms of home ownership. Therefore, there is going to be very attractive investments for folks in rental and properties for a long time. That's a very appropriate kind of CRE lending for us to do. So, we're not getting out of the real estate lending business. We'll be approaching it with an appropriate amount of energy given our long-term goals.

Kelly S. King, Chairman and CEO, BB&T Corp.



Capitalizing on Other Banks' Distress

"Period-end loans were up $8.2 billion from the second quarter reflecting our commitment to our commercial and retail customers through this period of economic uncertainty. Loan growth was once again driven by our commercial portfolio which grew $9.1 billion or 3% from the second quarter and was diverse across our commercial businesses. This growth also reflects our ability to capitalize on the opportunities generated in the business environment including the purchase of $1.1 billion in loans from the Bank of Ireland which were all U.S. based and largely all commercial real estate."

Timothy J. Sloan, Senior Executive Vice President and CFO, Wells Fargo & Co.



"We've originated a lot of loans for several years now that have come from competitors who had capital challenges or concentration of credit challenges or whatever and we have seen a lot of opportunities to originate loans for customers that have been able to buy assets from those weakened competitors or acquire loans that are discounted from those weakened competitors. So yes that has been a source of loan growth for us in the quarter just ended as it has been for quarters over the last three years."

George Gleason, Chairman and CEO, Bank of the Ozarks Inc.



Nearing an Inflection Point

"We believe commercial real estate may have reached an inflection point, as run-off is slowing and commercial mortgage originations grew linked-quarter. Our distressed loan portfolio continues to decline, but at a slower pace than in the past."

Richard J. Johnson, CFO, PNC Financial Services Group Inc.