The Impact of Commercial Property Risks on Banks in the US and Japan

Recent developments in the property market have raised concerns about commercial property risks, particularly in certain downtown areas. While regional banks in the US are more exposed to these risks due to their significant presence in commercial property lending, global banks that operate in the US tend to focus on larger cities. This divergence in lending trends has become apparent in the data for the first half of 2023, with international banks accounting for 25% of loans to central business district offices, while regional and local banks accounted for 17%. In contrast, regional and local banks dominated lending for medical offices and suburban offices.

One bank that has recently faced credit concerns related to commercial property risks is New York Community Bancorp, based in the New York region. Similarly, Aozora Bank in Japan has also reported increased credit concerns in the US property market. Both banks experienced a significant drop in their share prices after announcing these concerns.

In the case of Aozora Bank, the nonperforming office loans were concentrated in major cities such as Chicago and Los Angeles. Similarly, Deutsche Bank’s report highlighted that most of its evaluated office commercial real estate loans were split between New York, Los Angeles, and San Francisco. These findings demonstrate the higher concentration of at-risk property loans in big cities.

While commercial property lending is a major business for many US banks, especially those in big cities, smaller banks tend to concentrate more on “owner-occupied” commercial property lending, such as medical practices owning their buildings. In this market segment, factors like rental income streams or occupancy rates have less impact.

It is crucial for banks to carefully manage their exposure to commercial property risks and ensure adequate provisions for potential credit losses. Recent reports show that some banks have raised their reserve ratios to mitigate these risks, signaling their proactive approach towards maintaining financial stability.

Overall, the commercial property risks in the US and Japan highlight the importance of prudent lending practices, especially in major cities where these risks are more concentrated. Banks need to closely monitor and manage their exposure to these risks to safeguard their financial health and protect investors.