Delinquent commercial real estate loans at US banks have hit their highest level in a decade

Delinquent commercial real estate loans at US banks have hit their highest level in a decade, per FT.

In October, MarketWatch said: Banks are bracing for a recession.

"There is currently no obstacle preventing higher Treasury yields," states Kathy Jones, Chief Fixed-Income Strategist at Schwab Center for Financial Research.

While bank stocks are poised for annual losses due to a pronounced increase in interest rates, the banking industry's reserves are at their highest level in three decades, according to DBRS Morningstar.

Bank shares have faced increased selling pressure since the Federal Reserve signaled in September that it might maintain higher rates for an extended period. This stern stance has dampened the year's stock market rally and reignited a significant sell-off in the approximately $25 trillion Treasury market.

Kathy Jones emphasizes, "Right now, there is nothing standing in the way of higher Treasury yields. It's fairly obvious it's not good for banks. The rise in yields has just been relentless."

The surge in yields on newly issued Treasury bonds diminishes the value of portfolios containing lower coupon debt issued when rates were lower. Banks, in particular, hold substantial exposure to commercial property loans that could prove challenging to refinance if rates remain elevated for an extended duration.

Nevertheless, an examination of the banking industry's reserve levels indicates that lenders are preparing for potential credit deterioration and increased losses in the event of a recession. The chart reveals banking reserve coverage as a portion of nonperforming loans at 225% as of the second quarter, marking the highest level in three decades.

"Although credit quality remained relatively benign even as the Fed started raising interest rates in March 2022, the industry has nonetheless been increasing its reserves," note DBRS Morningstar analysts Eric Chan and Michael Driscoll in a Tuesday report. They believe that, despite the anticipated rise in credit losses, banking reforms following the 2007-2008 global financial crisis have positioned the industry to "weather any potential storms."

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