Fitch Ratings said today that the performance metrics of commercial real estate (CRE) continues to deteriorate at an unprecedented pace. The CRE market is where significant risk exposure exists for the majority of the rating agency's U.S. bank universe.

CRE loans, not including the more problematic construction and development portfolios, make up over 125% of total equity for the 20 largest banks that are rated by Fitch. The rating agency noted that the risk is even higher for banks with less than $20 billion in assets, as average CRE exposure makes up over 200% of total equity for these institutions.

Considering the degree of deterioration, and the considerable exposure of many U.S. banking and thrift institutions to CRE, the rating agency has recently launched an information survey geared toward obtaining more granular data on the CRE portfolios of the institutions it rates.

It intends to use this information to enhance its insight on the size and performance of specific segments of banks' CRE portfolios. This will allow the rating firm to frame areas of specific concern across the industry, conduct various stress tests, and assess if ratings changes are needed to reflect what will probably be continued asset quality deterioration.

Fitch's CMBS group reported last week that CMBS loan delinquencies has gone over 3% in July and are expected to rise to over 60% by year end to at least 5%.

Furthermore, Fitch said that roll rates from 30 to 60 days have risen to over 50% in 2009 and resolutions continue to slow.

"The same factors that are placing pressure on CMBS transactions are increasing pressure on the performance of bank and thrift-held CRE portfolios" according to Thomas Abruzzo, managing director and co-head of Fitch's North America financial institutions group.

The stress is clearly not limited to CMBS, according to Fitch. On the U.S. bank universe, Abruzzo said that, "large banking companies have seen levels of early-stage delinquencies, more severe delinquencies and non-accrual loans, as well as charge-offs increase markedly across their CRE and construction and development portfolios."

He added that although the 10%+ of construction and development loans in non-accrual is mostly attributed to residential construction activity, the 5% of the CRE book in non-accrual status shows more widespread problems.

Fitch currently assigns Negative Outlooks to close to half of the 20 largest U.S. bank and thrift institutions it rates. As Fitch has said in its recent bank rating actions, a major concern contributing to these Negative Outlooks is the likelihood of further deterioration in the institutions' loan portfolios specifically focusing on CRE exposures.

"While the relative size of the CRE portfolio is smaller for some of the very large banks Fitch rates, the recent performance trends, expectations for continued economic weakness and the uncertain availability of the CMBS market increases the concern regarding CRE exposure and makes it a likely rating driver as we look out over the next few quarters," said James Moss, managing director and co-head of Fitch's North America financial institutions group.

As part of the agency's expanded analysis, it has sent surveys to more than 75 Fitch-rated U.S. bank and thrift institutions requesting additional detail on the institution's exposure to CRE, covering both the banks' loan and investment portfolios.

Among the uniform information requested is: collateral type, geography, internal risk rating, and performance. Fitch also requested additional detail on each bank's largest exposures and watch credits. Fitch has asked that this information be provided by the middle of September.

Once in receipt of this information, the data will be compiled and the rating agency will start to offer commentary at an industry level on areas of exposure to provide investors with a better sense of where the considerable risk exposures are. Fitch will conduct various stress tests to find out a bank's ability to withstand incremental deterioration. Results of these scenarios will be highlighted in any rating actions Fitch thinks are needed.

Fitch's current bank and thrift ratings already incorporate further CRE portfolio stress, and many rating actions in the last two years have been caused in part by problematic exposures to CRE, particularly the residential construction sector. 

The rating agency thinks current indicators point to the probability for continued deterioration to surpass Fitch's current expectations. The analysis of the added data will help highlight which, if any, institution's portfolios are more vulnerable to an extended period of stress.

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