US Banks
Commercial Real Estate
Losses May Total $250-300b
Matt O-Connor, CFA
Research Analyst
(1) 212 250 8489
matthew.o-connor@db.com
Robert Placet, CFA
Associate Analyst
(1) 212 250 2619
robert.placet@db.com
Adam Chaim, CFA
Research Associate
(1) 212 250 2966
adam.chaim@db.com
Commercial real estate losses may be 3x current expectations
Deutsche Bank's CMBS Research team, led by Richard Parkus, published a report
on the outlook for CMBS and commercial real estate (CRE) loans at the banks. The
team estimates CMBS losses on 2005-2008 vintages will be 12-15% and that bank
losses may exceed this. They est construction losses at banks may be 25% or
more--implying total CRE/construction losses of $250-300b vs. we estimate less
than $100b assumed by consensus. The team will be hosting a conference call
7/21 at 11:00am ET. (866) 238-1640; 1371624. See full report attached below.
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1. MICA(P) 106/05/2009
Industry Update
Companies featured
Bank of America (BAC.N),USD12.91 Hold
BB&T (BBT.N),USD21.65 Hold
Comerica (CMA.N),USD21.84 Hold
First Horizon (FHN.N),USD12.05 Hold
Fifth Third (FITB.OQ),USD7.06 Hold
Huntington (HBAN.OQ),USD4.09 Hold
KeyCorp (KEY.N),USD5.20 Hold
Marshall & Ilsley (MI.N),USD4.91 Hold
M&T Bank (MTB.N),USD53.49 Hold
PNC (PNC.N),USD36.70 Hold
Regions Financial (RF.N),USD4.09 Buy
SunTrust (STI.N),USD15.98 Hold
TCF Financial (TCB.N),USD14.05 Hold
US Bancorp (USB.N),USD17.42 Buy
Wells Fargo (WFC.N),USD24.40 Hold
Zions (ZION.OQ),USD11.76 Hold
Global Markets Research Company
Why bank loans may be worse than CMBS
The CMBS team believes cumulative losses on bank loans may exceed that on
CMBS for the following reasons: 1) Growth in CMBS was robust in 2005-2007,
essentially absorbing the best loans at spreads too narrow for banks to participate.
This caused banks (especially community banks) to take on more risk in order to
achieve better spreads; 2) Banks tend to focus on transitional properties (i.e.
properties with a business plan vs. locked up cash flow)—which tend to suffer
more in downturns; 3) A larger portion of banks’ commercial real estate was
originated at the peak (2005-2007) and since bank loans tend to have 3-5 year
maturities, will mature at the trough of the downturn (2011-2012); 4) Over the past
few years, delinquency rates on bank commercial real estate have been 2-3x
higher than that on CMBS.
“Commercial real estate is a shoe that has already dropped”
JPMorgan Chase’s CEO, Jamie Dimon, noted in late May that “Commercial real
estate is a shoe that has already dropped” as vacancies will rise/rents will drop
and commercial real estate assets will have to reprice. However, we believe
losses taken to date at the banks have been relatively modest because lower
interest rates allow interest reserves to last another 1-2 years (beyond the typical
2-3 years) and banks have the ability to extend current loans—hoping to ride out
the storm (but potentially resulting in higher severities down the road). In total,
DB’s CMBS team believes banks are less than half way through recognizing
construction losses and 20% or less for commercial real estate.
Bank exposure to CRE and construction and development loans
In aggregate, banks have $1.7 trillion of loans classified as CRE with $1 trillion in
"core" CRE loans and $532b of construction and land development and $150b of
multifamily loans. Of the largest banks, we find that BBT, MI and ZION have the
largest exposure (relative to loans), while BAC, C and JPM have the smallest. Of
the banks we cover, we believe PNC is most exposed to CMBS (relative to
equity). See page 2 for bank-by-bank exposure.
Valuation/Risks
Based on our 2011E we find bank stocks on average trade at 10-11x. We base our
price targets on a combination of trough tangible book value and normalized EPS.
Primary industry risks include further steep declines in home prices, deterioration
in commercial real estate, rises in unemployment, capital markets disruption and
an unfavorable political landscape and general economic weakness Potential
positives include a faster than expected economic recovery.