U.S. banks posted a nearly 33% increase in delinquent commercial real estate loans in the first quarter from the end of 2019, according to data released this week by the Federal Deposit Insurance Corp.
It's an early sign of the pressure facing banks and borrowers as the economic fallout from COVID-19 lingers.
The increase is significant in that government-mandated stay-at-home orders to quell the spread of the coronavirus were only in effect for the past two or three weeks of the quarter. Moreover, delinquencies had been falling at an average quarterly rate of about 2.7% in the previous 24 quarters.
The impact of the pandemic was widespread on other bank results as well.
For the 5,116 commercial banks and savings institutions insured by the FDIC, aggregate net income declined nearly 70% to $18.5 billion — a decline of $42.2 billion from a year ago.
The decline in net income reflects deteriorating economic activity, which resulted in an increase in goodwill impairment charges and capital set aside to cover potential losses, according to the FDIC.
“During the last month of the first quarter, the COVID-19 pandemic led governments across the world to take emergency actions, including widespread stay-at-home orders that temporarily shut down large portions of the global economy. The attendant economic downturn, illustrated by the 5% decrease in U.S. GDP during the first quarter, adversely affected several industry sectors and financial markets,” FDIC Chairwoman Jelena McWilliams said in a statement.
Bank earnings were negatively affected by increases in loan loss provisions, McWilliams added.
Banks had $196.8 billion set aside for loan and lease losses at the end of the first quarter, up about $73 billion, or 59%, from year-end 2019, according to FDIC numbers.
A portion of that increase came from increased lending in the quarter as well as increased projections for losses, the FDIC said.
Total loan and lease balances increased by $442.9 billion, or 4.2%, from the previous quarter. Almost all major loan categories reported quarterly increases, including commercial real estate, which was up $39.8 billion, or 1.7%. The largest increase came from lending to commercial and industrial businesses, which was up $339.4 billion, a 15.4% increase.
In looking at delinquent commercial real estate loan totals, the largest increase came from loans that were 30 to 89 days delinquent. That total increased by $2.91 billion to $8.58 billion, a 51% increase.
Loans that were past due more than 90 days decreased by $60 million to $831 million, a decline of nearly 7%.
The most troubled of delinquent loans, those that had been moved into nonaccrual status and no longer generating interest, increased by $2.21 billion to $11.15 billion, a 25% increase.
By type of loan, nonresidential commercial property loan delinquencies increased by $3.96 billion to $15.36 billion, a nearly 35% increase. Multifamily loan delinquencies increased by $355 million to $1.5 billion, a 31% increase. Construction loan delinquencies increased by $749 million to $3.7 billion, a 25% increase.
Importantly, the bank delinquency figures exclude loans to borrowers who received loan forbearance and were current on their obligations at the time the halt in payments was granted, according to a recent report from Fitch Ratings.
Banks have typically offered forbearance to commercial borrowers for up to 90 days, which means that delinquency numbers could rise significantly in future quarterly results, Fitch reported.
In another indicator of future distress, the FDIC reported this week that the number of banks on its so-called problem bank list increased from 51 to 54 during the first quarter. That is the first quarterly increase since 2011. However, the number of problem banks remains near historic lows.
The problem bank list is a confidential report created and maintained by the FDIC that tracks banks that are in jeopardy of failing.