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Banks' $300 Billion 'Pretend' Problem

Stocks in this article: C BAC JPM WFC STI

Although commercial real estate has been able to keep its head above water over the past several years as occupancy rates remained stable, industry watchers are already seeing signs of weakness.

"Our detailed research through earnings reports and call report filings from smaller banks indicates that the recovery in delinquency rates that began in the second quarter of 2010 appears to have stalled," said Matt Anderson, managing director of real estate research firm Trepp, in an April report. "This underscores the fact that markets have not yet truly recovered and also reflects anemic growth for both residential and commercial real estate."

Trepp estimates that over $1.7 trillion in commercial real estate loans will mature between now and 2015, with over $300 billion each year between now and 2013.

Gorczycki said underperforming commercial real estate deals are rising just as billions in loans are set to renew over the next 18 months, forcing many banks to either find a way to refinance or face the losses.

"Rolling has worked as values rebounded and many cases banks were able to kick the can down the road," Gorczycki says. "But all that has meant is there will be just more rollovers in 2012 and 2013. At some point there is no doubt that clock will stop."

While there is no definitive list of which banks have the most to lose if commercial real estate rollovers cease, Fitch said banks with the highest non-owner occupied commercial real estate concentrations include Cathay General Bancorp (CATY), CVB Financial (CVBF), AmeriServe Financial (ASRV), Sterling Bankshares (SBIB) and First Midwest Bancorp (FMBI).

In addition, Fitch said banks with the highest percentage of restructured loans (both residential and commercial) include Citigroup (C), JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC) and SunTrust Banks (STI).

The banking industry's reliance on extend and pretend has some merit, Gorczycki said, adding that if there is no reason to sell a property there is no reason to take a loss on the loan.

However, the buildup of billions in loans with little liquidity to extend the maturities going forward means that some banks will be taking "monstrous losses," Gorczycki said.

"Part of our whole business model was to rollover the loans," he added. "Low rates and rising value cure all. The problem is that it doesn't last forever."

-- By Christopher Westfall.

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