In Asian trading, Japanese lender Aozola warned of similar losses on its U.S. commercial real estate exposure, sending its shares down 21%. The bank said $719 million in non-performing loans accounted for 38% of its $1.9 billion office exposure in major U.S. cities.
National Australia Bank shares fell 2.2 per cent to $31.90 at Thursday's close, Westpac fell 1.7 per cent to $23.77 and ANZ fell 1 per cent to $26.92.
Roni Green, chief investment officer at GF Asset Management, said the market had been hit with a “one-two punch” in the past 24 hours.
“Infection should be limited”
“Community Bancorp and Aozora reminded investors of the dangers lurking in U.S. commercial real estate,” Green said.
“Investors have been considering commercial real estate exposure to large banks since the pandemic, and the spread of infection should be limited. Credit spreads on bank bonds widened overnight, but valuations remain aggressively priced. It's not as attractive as it should be, so there's a lot of alarm.”
The U.S. commercial real estate sector is under intense pressure, with office building owners in particular facing significant pressure as remote work rates remain high and rising interest rates make real estate assets relatively less attractive to investors. I've been hit hard.
About $541 billion in debt backed by office towers, apartments and other commercial real estate assets came due last year, according to data provider Trep. That amount is expected to increase to more than $2.2 trillion by the end of 2027.
Some Australian investors have significant exposure to the US commercial property market. AustralianSuper wrote down one investment it owned with Brookfield, a 12-storey office tower in Washington DC, in October.
“The story surrounding it is [commercial real estate] “The situation is raising skepticism and concern, especially in the wake of Community Bancorp's recent disclosures,” said Stephen Innes of SPI Asset Management.
“While some may view the commercial real estate apocalypse as an exaggerated story akin to a ghost story around the campfire, the reality highlighted by Community Bancorp suggests otherwise. ”
Moody's has already put all long-term and short-term ratings of Community Bancorp and its subsidiary Flagstar Bank under review for downgrade. The rating agency said this reflected unexpected losses, weaker revenues and increased reliance on wholesale funding in New York's office and apartment real estate lending portfolio.
Real estate-related write-downs are likely to slow the flow of credit to the world's largest economy, as the local bank crisis in March triggered by the collapse of a Silicon Valley bank has not fully spread. This proves the validity of the analysts who have been warning.
“If default rates continue to rise and stress on bank balance sheets continues to increase, given that banks are still grappling with legacy portfolio issues related to leveraged buyout debt and commercial real estate loans, It's clearly a possibility, but if that happens, regulators will be asked to increase buffers for financial institutions.The noise in the financial system will become even louder.''Oaktree Portfolio Managers Armen Panosyan and Daniel – Mr. Poli stated in his quarterly update.
“Given all of this, it's natural to think that banks' ability to provide capital will decline in the future, just as more companies look to refinance the huge debts they incurred during the era of monetary easing.”
