Moody's indicated that at least six American regional banks holding large amounts of commercial real estate loan exposures face the risk of debt rating downgrades.
According to Futu Securities, Moody's indicates at least six American regional banks that hold large amounts of commercial real estate loan exposures face the risk of debt rating downgrades, including First Merchants (FRME.US), F.N.B. Corp (FNB.US), Fulton Financial (FULT.US), Old National Bancorp (ONB.US), Peapack-Gladstone Financial (PGC.US), and WaFd (WAFD.US), which are all on its watchlist for possible long-term rating downgrades.
Moody's stated in another statement that as long-term high interest rates exacerbate long-term risks, especially during periods of low cycles, regional banks holding large amounts of commercial real estate loans face continuing asset quality and profitability pressures.
Moody's states that, prior to the start of the Federal Reserve's hiking cycle in a low-rate environment, many regional banks established and concentrated their commercial real estate exposures, which are a "volatile asset class." For example, as of March 31, the asset class constitutes 267% of Fulton's common equity.
Market concerns over American regional banks have resumed. On Tuesday, D.A. Davidson & Co. released a report on Axos (AX.US), scrutinizing its commercial real estate exposure and "excessive" valuation premiums, making it the latest bank under close watch. Axos' stock price fell as much as 16%, marking the biggest one-day drop since March 2020, before rebounding.
High borrowing costs have hit property valuations, and uncertainty over Federal Reserve rate cuts exacerbates this challenge. "There are some cracks in the real estate industry emerging," said Josh Zegen, co-founder of lender Madison Realty Capital. "This year, we'll see more of that."