Banks Charging Off Bad Commercial Loans at Fast Pace

A new Wall Street Journal analysis shows that U.S. banks are charging off bad commercial mortgages at the fastest pace in almost two decades.  At the current clip, losses on loans that financed apartments, retail centers, offices, and other commercial real estate could total nearly $30 billion by the end of the year.

Thousands of U.S. banks loaded up on commercial-property debt; as a result, losses on such loans will be on the radar as banks post quarterly results in coming weeks.  Regulators, meanwhile, continue to push some bankers to take losses on commercial real-estate exposure now as a way to lessen the blow of a catastrophic hit later.  Some analysts remain concerned that some banks are not sufficiently recognizing losses on their commercial real-estate loans, thereby exposing themselves to larger losses later.

According to Deutsche Bank AG, since the beginning of 2008, the amount of charged-off commercial mortgages as a percentage of such debt outstanding has ranged from a high of 3.2 percent to as low as 0.3 percent.  Richard Parkus, head of commercial mortgage-backed securities research at Deutsche Bank, comments, “Net charge-offs to date have been highly inadequate. This is clearly a problem that is being pushed out into the future.”

Banks are balancing the ability to take charge offs (or loan loss reserves) with the capacity on their balance sheet to absorb such loses without jeopardizing their capital condition with the regulators.