Moody’s puts six U.S. regional banks on downgrade review over CRE exposure

Ratings agency Moody’s placed ratings of six U.S regional banks on review for downgrade on Thursday due to their substantial exposure to commercial real estate loans.

The long-term ratings of First Merchants Corp, F.N.B. Corp, Fulton Financial Corp, Old National Bancorp, Peapack-Gladstone Financial Corp and WaFd were placed on review.

These banks have substantial concentration in CRE loans, which are facing asset quality and profitability pressures with higher-for-longer interest rates raising longstanding risks, especially during cycle downturns, Moody’s said in separate statements.

During the low-interest-rate environment prior to the onset of the Federal Reserve’s rate-hike cycle, many regional banks chose to build and maintain substantial concentrations in CRE, which is a volatile asset class, Moody’s said.

Regional banks with exposure to the beleaguered commercial real estate sector have come under investor scrutiny after New York Community Bancorp’s recent turmoil.

Non-performing CRE loans as a percentage of U.S. banks’ portfolios doubled to 0.81% by the end of 2023 from a year earlier, the International Monetary Fund said in its semi-annual Global Financial Stability report in April.

Banks have continued to increase provisions for bad CRE loans, the IMF noted in its report.