Good news for the bank industry. They are coming back from death

Good news have been trickling – bank stocks have started to soar. The banking industry seems to have come back from the jaws of death. But the celebrations could be a bit early. Dark clouds are gathering quietly without drawing attention. Trouble is brewing with commercial real estates.

At an unprecedented speed loans granted against commercial estates like office units and malls are souring as per a report recently released by Deutsche Bank. Delinquency on commercial property loans had touched 4.1% last June – it being double that of the March figures. The small and regional banks are most at risk. These banks have in their portfolio commercial real estate loans worth $1 trillion. There is $530 billion in addition tied up as loans given for construction projects.

At the root has been a snowballing effect that started with home foreclosures which led on to unemployment. Without jobs the offices are vacant and without offices operating the landlords cannot be paid. Without payment the landlords are becoming delinquent on their loans. Consequently the banks are not getting any money.

Consumers who have tightened their fists have led to the shutting down of retail units like Circuit City. The landlords are now defaulting. This way the banking industry is being hit in layers.

The worst to be hit are the smaller banks. They have advanced many commercial loans. It is their failures that have caused the number of bank failures to increase to a high figure like 89 this year. It was 25 in the previous year. One of the recent banks to fall is Affinity Bank that had 46% of its loans ($805 million) tied to commercial estates. It can be compared with other banks that have 33% commercial loans in their portfolios according to Keefe Bruyette & Woods.

Regional banks are also on slippery ground. This is a cause for grave concern for the economy. Topping the list of potential concerns is United Commercial of San Francisco. It has been listed in Barclays Capital research. The bank having assets of $12.7 billion has failed to submit second quarter report – it being mandatory as per bank regulations.

The jumbo banks with assets of at least $1 trillion are not so much at risk. JPMorgan Chase holds 5.4% of these loans and Citigroup holds 3.4% according to government data. Of these big banks Wells Fargo has a sizeable proportion of commercial loans – 16.5%.

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