Major banks show resilience to CRE stress despite risks: Fitch

November 13, 2024 (MLN): Major global banks would be fairly resilient to a significant commercial real estate (CRE) stress, focused on US office, Hong Kong and China CRE.

Half of the analysed sample, including some higher-rated banks with lower rating headroom, would be vulnerable to a one-notch standalone credit downgrade, says Fitch Ratings in a new report.

Fitch has applied a simplified stress scenario to a global peer group of 16 US, German, Nordic, and Asia-Pacific banks with CRE exposures over 2x their common equity Tier 1 (CET1) capital and consolidated total assets above $50 billion.

Operating profit would limit the average fall in CET1 ratios to just 0.22pp.

Three banks with Viability Ratings (VR) in the ‘aa’ category – two Singaporean and one Swedish – would face a one-notch VR downgrade as their pre-stress rating headroom is limited.

Five other US and German banks would face a one-notch VR downgrade due to their relatively high CRE exposure. The remaining eight banks’ VRs would be unaffected.

The stress was applied as an instantaneous shock to financial statements and CRE collateral data. All CRE exposures with loan-to-values (LTVs) at or above 80% were assumed to default, with LTVs restated to 100%.

Of the CRE exposures with LTVs below 80%, a fifth of US office CRE, Hong Kong and China CRE loans were assumed to default, with LTVs restated to 85%.

Lastly, 10% of other office CRE exposures were assumed to default, with LTVs restated to 75%. When calculating loss given default, Fitch applied a further 30% discount to collateral recoveries, and did not factor in any equity injections from sponsors or borrowers.

The stress indicates relative VR vulnerabilities but does not reflect Fitch’s base case. The CRE asset quality deterioration factored into our base case would not, in itself, lead to downgrades.

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