Q2 2015 U.S. Banking Review: Commercial Real Estate Portfolio

The U.S. banking industry has seen the size of total outstanding loans swell considerably over recent years thanks to the low interest rate environment since the economic downturn, even as the country’s economy has improved steadily. As we pointed out in a recent article, a bulk of this growth has been from an unprecedented increase in the size of commercial and industrial loans since late 2010. In sharp contrast, commercial real estate (CRE) loans across U.S. banks have grown at a rate of roughly 1% annually over the last five years. This makes CRE loans the second-slowest growing loan category for banks during this period – after mortgage loans.

This is not surprising, given the fact that the recession in 2008 was primarily triggered by a real estate bubble, and banks continue to clean up their balance sheet of lower quality real estate loans. In this article, we delve deeper into the trends in the commercial real estate (CRE) loan portfolio of the country’s largest banks – JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC) and U.S. Bancorp (NYSE:USB) – over the last three years, and also compare the proportion of CRE loans in their overall loan portfolios.

See the full Trefis analysis for Wells Fargo | JPMorgan | U.S. Bancorp | Bank of America | Citigroup

The table below highlights the proportion of loans held by all U.S. commercial banks at three specific periods: in October 2008, when loans were at their peak before the recession; in February 2010, when loans were at the lowest level since the recession; and in September 2015, the latest period for which data is available. The table uses historical data compiled by the Federal Reserve. ^[1] The figures in brackets are the percentage of the total loans falling in a particular category.

It should be noted that credit card loans include unsecured revolving credit, while retail loans include auto loans, student loans and other secured consumer loans. Other loans are made up of loans to financial institutions as well as the lending of federal funds and reverse repurchase agreements. Commercial real estate loans encompass all loans handed out by banks for the construction or mortgage of commercial properties. This includes office buildings, industrial properties/warehouse, apartments, shopping centers, hotels/motels and land.

As evidenced by the chart above, CRE loans have grown by less than 6% since February 2010 – a sharp contrast from commercial loans, which witnessed growth of almost 60% over the same period. In fact, the total CRE loan portfolio is currently below the peak figure of $1.72 trillion seen in late 2008. An overall weak level of activity in the CRE lending industry, sizable write-offs over 2009-2013 and strong repayment volumes are responsible for the poor growth in total CRE loans. Sluggish growth has resulted in a sharp increase in the proportion of these loans for U.S. banks from almost 25% in early 2010 to 20% now. Notably, an increase in non-bank lenders specializing in commercial real estate lending has also been responsible for a reduction in the share of commercial banks in the industry.

The table below captures the average size of the CRE lending portfolio for each of the country’s largest banks. The data has been compiled using figures reported by individual banks as a part of their quarterly announcements.

Wells Fargo, the country’s largest mortgage lender, also has the largest CRE loan portfolio – highlighting the overall focus of the banking giant on the real estate sector. However, JPMorgan has seen the largest growth in CRE loans over the last three years, showing that the country’s largest bank has adopted a policy of aggressive growth in the industry. The bank’s CRE loan portfolio has grown nearly 50% over a period which saw marginal growth in these loans for the banking sector, which suggests that a sizable portion of clients who refinanced these loans over the last three years shifted to JPMorgan from its rivals.

The CRE lending businesses for these five banks taken together constitute just over 10% of their total loan portfolios. U.S. Bancorp has the largest share of these loans in its portfolio, as they make up almost 18% of all its loans. Wells Fargo also relies significantly on CRE loans, with these loans making up more than 15% of its total loan book. CRE loans at Citigroup and Bank of America constitute around 6% of their respective loan portfolios, while JPMorgan reports just over 9% of its total loans as being commercial real estate loans loans.

Excluding non-U.S. CRE loans for each of these banks, we estimate that these five banks have a commercial real estate lending portfolio in the U.S. of roughly $330 billion. This represents just under 20% of the total outstanding CRE loans in the country – indicating that some of the largest players in the sector are smaller companies and banks that specialize in this particular loan category.

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1. Assets and Liabilities of Commercial Banks in the U.S. (H.8), Federal Reserve Website [↩]