Nation's Largest Lenders Tighten Real Estate Loans as Economic Expansion Matures
The nation's largest banks are being more cautious with their commercial real estate lending, based on what they are saying on their earnings conference calls.
The same headwinds that slowed bank lending last year are extending into 2019, as economists debate how much longer the current economic expansion, on pace to reach a record stretch in July unless the effects of the government shutdown stop it sooner, can continue. Interest rates are projected to keep going up and institutions face stiff competition for deals from nonbank lenders.
In addition, borrowers are prepaying loans sooner as properties trade hands, slowing the growth of loans on bank books.
Marianne Lake, chief financial officer at JPMorgan Chase & Co., reported commercial real estate loans were up 2 percent in the fourth quarter, less than its recent pace of about 3.9 percent, according to data from the Federal Deposit Insurance Corp. That was below the industry average of 4.5 percent.
"In mature markets we’re again being pretty prudent," Lake said. "I won’t call it tightening, but being very selective."
Lake added the bank is "tightening" construction lending.
"We’re going to protect profitability and credit discipline over growth at this point," she said.
As of September 2018, JPMorgan Chase was the second-largest holder among U.S. banks of commercial real estate loans with $119 billion. Only Wells Fargo & Co. with $132 billion topped it.
Wells Fargo gave a similar outlook as JPMorgan for 2019.
"Commercial real estate loans were down $583 million from the third quarter and it declined for seven consecutive quarters, reflecting continued credit discipline and competition in the highly liquid markets and pay downs of existing and acquired loans," reported John Shrewsberry, Wells Fargo's chief financial officer. "We anticipate these market factors will continue to impact portfolio balances in the near term."
New York-based Signature Bank, with the nation's 10th-largest commercial real estate loan portfolio, reported its commercial and industrial business loan growth substantially outpaced commercial real estate lending. This was the first time in at least 11 years that Signature has reported such a result as the bank has ramped up business loans more than it did commercial real estate loans.
That will spill into 2019, said Joseph DePaolo, the bank's chief executive, as part of the bank's plan to move away from fixed-income, fixed-rate loans to more variable or floating-rate loans.
The Federal Reserve Board's latest Beige Book, an anecdotal look at conditions around the country, suggests a better lending outlook from smaller banks, which reported steady demand for commercial mortgages.
Commercial real estate loan losses are still minimal, as underlying fundamentals remain strong.
The Mortgage Bankers Association is reporting it expects another strong year of loan originations.
More than half of the top commercial/multifamily firms, 55 percent, expect originations to increase in 2019, with 13 percent expecting an overall increase of 5 percent or more across the entire market. When forecasting just their own firm's originations, 38 percent expect to see an increase of 5 percent or more in 2019.
"Mortgage bankers look to 2019 as another strong year for the commercial and multifamily mortgage markets," said Jamie Woodwell, MBA's vice president of research and economics. "The majority of top firms expect that 'strong' appetites from both lenders and borrowers will drive commercial mortgage originations higher."