U.S. banks are upping their reserves in anticipation of a recession in the near future, but are still making commercial real estate loans at a higher rate than a year ago.
In the fourth quarter of 2022, banks made about $2.4T in CRE loans, including construction and multifamily loans, according to Bankregdata. That is up from $2.2T in the previous quarter and $2.1T a year earlier.
The industry’s total Tier 1 capital plus the allowance for loan and lease losses came in at nearly $2.3T during the fourth quarter, up from $2.2T a year earlier.
Tier 1 capital refers to a bank’s equity capital and other disclosed reserves and is a metric of the bank’s solvency.
Banks are expecting a recession this year, but not a deep one.
“[Our] net reserve build of $1.4B was driven by updates to the firm’s macroeconomic outlook, which now reflects a mild recession in the central case as well as loan growth,” JPMorgan Chase & Co. Chief Financial Officer Jeremy Barnum said during the bank’s most recent earnings call in January.
Barnum stressed, at least in the case of his bank, that its CRE loan portfolio is mostly strong.
“The vast majority of [our] loan balances in commercial real estate are that sort of affordable multifamily housing, commercial term lending stuff, which is really quite secure from a credit perspective for a variety of reasons,” Barnum said. “The central case economic forecast has a mild recession and if I remember correctly, unemployment peaking at something like 4.9%.”
The current headline unemployment rate is 3.4%, the lowest in more than 50 years.
Another reason banks have boosted their reserves is a recent change in accounting practices, The Motley Fool reports. The Financial Accounting Standards Board implemented new standards in 2020 that require banks to reserve losses on the life of loans as soon as they are on balance sheets.
Thus, even if banks don’t expect credit losses immediately, they need to prepare for them, using their experience and current conditions as the basis of the loss estimates.