Banks reduced the amount of charge-offs against their loan books, even as the rate of growth in delinquent commercial real estate loans picked up steam in the third quarter. It may be a short-lived reduction.
A charge-off means the bank has removed the value of the loans from its books and charged them against loss reserves.
The delinquency rate on commercial real estate loans peaked at 9% in 2010 in the aftermath of the financial crisis in 2008 and fell to a recent low of 0.68% in 2019. It spiked again at the end of 2020 following three quarters of disruption from the coronavirus pandemic.
It has been climbing again for the last four quarters following steep increases in borrowing rates by the Federal Reserve. They have now surpassed the pandemic peaks.
Charge-off rates, though, fell back in the third quarter after having topped pandemic levels.
The write-down in property loan values may not be done yet, according to banks in their third-quarter financial reporting. Net charge-offs increased from historical low levels in 2022, primarily driven by office portfolios, banks reported. However, banks do expect higher losses over time as delinquencies continue to increase.
In addition, charge-offs have been highest among the largest banks, which have been quicker to write down their commercial real estate loans, according to Federal Deposit Insurance Corp. data.
Banks held $2.8 trillion of commercial real estate loans on their books at the end of the third quarter, according to FDIC data.