RBC sees exposure to Commercial Real Estate among top 20 banks manageable

In a "deeper dive" research note on U.S. Banks, RBC Capital concludes that while investors may be concerned with the industry’s exposure to commercial real estate, CRE, in an environment where values are under downward pressure due to higher capitalization rates and rising vacancies, the exposure to CRE among top 20 banks is "manageable". In a slower economy and a potential recession, banks will likely see higher criticized CRE loans and credit losses, but a scenario that mirrors the 1990 downturn in CRE and its devastating impact on the banking industry and bank stock prices is not likely, the analyst tells investors in a research note. Large banks should be able to navigate through the challenges without suffering the devastation experienced in the early-1990s, RBC states. The firm further notes that the average CRE exposure for the top 20 banks was 11.2% at year-end 2022, which is significantly lower than the top 100 bank average of 26.5% and the industry’s average of 18.0%. RBC adds that construction loans, which is the highest risk category within the CRE portfolio is very low at 2.7% of total loans for the top 20 banks, whereas in 1988-1990, it was not uncommon for the large banks to have greater than 10% of total loans in construction and land development loans. Publicly traded companies in the large-bank space include Bank of America (BAC), Citi (C), Goldman Sachs (GS), JPMorgan (JPM), Morgan Stanley (MS), U.S. Bancorp (USB) and Wells Fargo (WFC).