Pacific Investment Management Co. (PIMCO) foresees a surge in regional bank failures across the U.S. due to their significant exposure to troubled commercial real estate loans.
What Happened: According to John Murray, head of PIMCO’s global private commercial real estate team, the distress wave for lenders to properties like malls and offices is just beginning, Bloomberg reported on Tuesday. His division is part of PIMCO's $173 billion alternatives business.
High borrowing costs and uncertainty over Federal Reserve interest rate cuts have exacerbated challenges in the commercial real estate sector. This has led to defaults and left lenders with hard-to-sell assets. Larger banks have begun selling higher-quality assets first to avoid deeper losses.
Murray noted that as stressed loans mature, banks are expected to offload more challenged loans to reduce troubled loan exposures. PIMCO has been acquiring these commercial real estate loans from large U.S. banks for the past 18 months.
Regional banks, which increased their commercial real estate exposure, are particularly affected. Their assets are now worth a fraction of their peak value, causing investor concerns since the collapse of several banks last year.
U.S. Bancorp, the largest regional bank by assets, increased its provisions for credit losses to $553 million in the first quarter of this year.
Meanwhile, mortgage real estate investment trusts have also faced challenges, limiting their ability to underwrite new investments. Lending volumes for major public mortgage REITs have dropped 70% from 2021 levels, according to Murray.
Why It Matters: The warning from PIMCO comes in the wake of a turbulent period for regional banks. The collapse of Silicon Valley Bank in March sent shockwaves through the sector, causing regional bank stocks to trade about 13% lower than their pre-collapse levels. The SPDR S&P Regional Banking ETF (KRE) reflects this ongoing investor wariness.
Adding to the turmoil, U.S. regulators seized Republic First Bancorp and sold it to Fulton Bank in April. This move followed the collapse of three other regional banks, highlighting the sector’s vulnerability. The Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corp. (FDIC) intervened to protect depositors.
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This story was generated using Benzinga Neuro and edited by Pooja Rajkumari
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