"According to a recent JPMorgan Chase report on commercial mortgage-backed securities Analyst Alan Todd said that retail delinquencies of 60 days or more were 0.40% in October, increasing from a low of 0.08% in July 2007. Over the same time period, office delinquencies increased to 1.29% from 0.47% and multifamily delinquencies increased to 0.28% from 0.11%. The report also noted commercial property prices had only fallen 11% from their peak, and were expected to fall 30% to 40% "over the next few years."
Doorn's analysis compared the bank's non-performing commercial real estate (CRE) and commercial construction loan holdings (CCL) to the bank's total assets. The complete list can be found below (click the image)
Simple logic leads me to believe that the rate of delinquencies on commercial real estate loans is going to increase significantly. A weak economy decreases demand for goods, companies decrease prices (and cut margins) to spur demand, companies can no longer turn a profit, go out of business and become delinquent on their commercial loans. A very simplified chain of events but it illustrates that banks, especially the ones listed above, should be very worried about their commercial loan holdings.
2 comments:
Eric, to what extent do you believe this scenario or expecation has already been priced into the banks holding this paper?
It is hard to pin point exactly what is or is not priced into the market value of banks right now. However, W HOLDING CO INC (WHI)which had the worst ratio in the analysis has seen its stock drop from $100.00 to $6.00 over the past 52 weeks. However, for banks with more exoctic assets tied to commercial real estate I imagine that the potential impact of this scenario is not fully appreciated by investors who might be thinking that banks stocks have bottomed out.
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