With Concerns Over What They Consider Overly Aggressive Pricing, Some Banks Getting More Choosey Over Lending
As an indicator of just how much conditions for commercial property sales has improved, some lenders report that they are starting to back away from deals in an increasingly crowded commercial real estate
Terms for some in-demand loans have become so competitive that lender profits have narrowed to the point where the banks decided not to compete for the deal. In some case, they say underwriting standards have loosened to the point that some bankers won't take the risk.
"We do see continued loosening of credit standards and pricing, especially on the middle market commercial side," Edward J. Wehmer, president and CEO of Chicago-based Wintrust Financial, told analysts at his earnings conference call this past week. "Rental properties in the city are going through the roof right now. You are looking at values going back to 2006 values and 2006 cap rates, and you’ve seen some kind of goofy pricing of people going in and trying to finance those businesses."
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Joseph J. Depaolo, CEO and president of New York-based Signature Bank said they had been able to hold the line on their price for the past three quarters but have "had some heavy discussions as to what we would do this quarter in terms of reducing pricing."
"We've seen some of what we would characterize as overly aggressive pricing. What I mean by that as an example, we've seen some banks do 35- and 40-year amortizations. We've seen some sub-3% 5-year fixed (loans). We've seen 10-year fixed at 3%. We've seen 10-year fixed with no prepayment penalty, which we believe is overly aggressive, and certainly things that we would not do."
At the same time though, Depaolo said his bank doesn't want to lose its quality credit borrowers to another bank offering cheaper money.
"So maybe where the quality credit certainly deserves the lower pricing, some of the mediocre credits are commanding that as well because of the overly aggressive stance of some of the big banks. So we're not seeing relief anywhere," Depaolo said. "We expect the decrease for the last several quarters to continue. I don't know where the bottom is yet."
"I will tell you this," he continued, "there are certain loans across all categories that we would not meet the pricing that's currently being suggested by some of our competitors today. I won't say what those prices are. But I will tell you this: we will not be doing 40-year amortization loans. We will not be doing 10-year fixed at 3% and no prepayment penalties. It just doesn't make sense."
Shift Seen To New Purchases and Construction
The nation has seen broad-based improvement in loan demand as energy-related lending has remained strong and commercial real estate and home equity lending has bounced up from bottom levels. In addition, bankers said they have seen a shift from mortgage refinancing to new purchases and new construction. And those are areas until recently from which banks have shied.
Russell D. Goldsmith, chairman and CEO of Los Angeles-based City National Bank, said he's seen larger companies become more optimistic and more aggressive about borrowing.
"You're seeing owner-occupied real estate as an area where people are taking advantage of these very low rates and financing their businesses' headquarters or warehouse or whatever it is. You're starting to see some pickup in construction. We have a little uptick there with some multifamily infill construction," said Goldsmith.
City National's CFO Christopher J. Carey added that, "there is still a lot of churn in that business, though. And we try to price competitively. There are some people that we think are virtually giving the business away and when we look at it, we think they're generating ROEs in the 20 and 30 basis points and that's -- we're not going to go that low, so it's a highly competitive market. And our -- the activity we have there is very high but there's still, unfortunately, there's a fair amount of churn in there, too."
William S. Demchak, president of Pittsburgh-based PNC Bank, said they are seeing reaching a point where they are willing to focus on larger, higher quality loans rather than volume.
"We're reaching the point now where we're willing to give up volume here because the spread levels have kind of gotten down to the point where our returns on equity are basically at the margin," Demchak said. "In the larger commercial side where things need to be syndicated, let's leave out leveraged loans for a second, things are -- they're tightening but structures are still same. And for these to go to a handful of banks, it's still decent value on that, still decent spreads and asset base."
"We've seen compression in real estate but thus far not to the point where I would be worried about it," Demchak added. "Perhaps starting to see some of that in multifamily projects that are coming on. But it's getting tight. People are chasing assets. There's no yield on securities. And they're going to chase loans, it's not a surprise. And what we do when that happens is we'll gradually change our focus from new loan balances to cross-sell and harvest all the new clients that we added over the last couple of years."
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