CRE Losses a Major Threat to Banks

On July 13, 2009, the Wall Street Journal published its report on Western banks in the U.S., providing a timely review of the sector to serious investors and industry executives.
 
The companies included in the report are: PacWest (PACW - Snapshot Report), Western Alliance (WAL - Snapshot Report), Zions Bancorp (ZION - Analyst Report), City National (CYN - Snapshot Report) and Westamerica Bancorp. (WABC - Analyst Report), to name a few.
 
According to the report, most banks will make efforts to restructure loans, fix their balance sheets by disposing off problem assets in the next 12 to 18 months. In the process, many banks may experience capital erosion whereas the others with adequate capital will be able to withstand the losses in the coming quarters.

A lot will depend on how intensified the losses will be in the commercial real estate (CRE) portfolios, which is a cause of main concern in the coming months. The residential portfolio of most banks has somewhat corrected and is not as big a threat as it was in the past. Experts believe that it may take at least a year or two before these banks can witness a healthy upsurge in earnings.
 
Valuation is also difficult to determine in these times, as most banks are having negative P/E, expecting to report losses this year. Further, a majority of banks are trading at a significant discount to their book values.

Many of these banks may experience substantial erosion to their book values driven by losses in their CRE portfolios they will experience in the coming quarters. As such, investors are going to stay away from the banking companies until they see some signs of stability in their asset quality, loan portfolios and overall profitability.
 
While it is still difficult to estimate the timing of a recovery in the CRE portfolio, based on the current scenario, we expect higher losses and reserve building to continue throughout 2009 and even in the first half of 2010.