BID® Daily Newsletter
Dec 28, 2012

BID® Daily Newsletter

Dec 28, 2012

STRANGE SHOPPING HABITS & CRE RISK MANAGEMENT


Here is a weird statistic. Research from the Point of Purchase Advertising International finds 76% of grocery shoppers make their purchasing decisions in-store. It seems people like to explore the isles to see what new products might be available as they look for inspiration around what they might eat. While banks aren't supermarkets, you might be able to use this information to help your own product sales in the coming year, so we thought we would share it.
Speaking of strange statistics, regulatory research has found that construction and land development concentrations were about 6 times higher at banks that failed during this crisis than they were at banks that survived. In addition, commercial real estate (CRE) concentrations were 3 times higher at failed banks than they were at surviving banks. This is one key reason regulators came out with the 100% / 300% guidance on concentrations in this area and a driver around the importance of doing more stress testing and capital planning.
The good news for the industry is that the CRE market has stabilized, concentrations have declined and our analysis is more robust so bankers are arguably more prepared now than ever before. A disciplined approach to lending in this sector has slowly emerged over the past few years, as the importance of data collection and analysis has ramped up. Today, lending teams look beyond cash flow and collateral to sector type, subtype and a host of other items to better understand risk. This has created a stronger approach for the industry at large and is slowly adding consistency to the collection of data at the root level.
Things have evolved over the years and bankers are even more focused now on collecting and analyzing data on the national economy; the local economy; population; employment levels; consumer spending; interest rates; inflation pressures; sector supply and sector demand. This information is gathered, compiled, analyzed and then reported to the lending team so decisions can be made whether to enter, exit, increase or reduce exposures as conditions change. This is good because CRE is the bread and butter of community bank lending in most regions, so the more accurate and appropriate data that can be collected and analyzed, the better the information is around where to lend.
The good news for CRE lenders is that housing has rebounded and prices are recovering so that sector is on the mend. In addition, CRE prices for most sectors in most of the markets have also gained traction over the past few years. While some are still seeing sluggish growth, the signs are positive and the momentum appears to be increasing, so that is good news as banks fine-tune lending plans for 2013.
One thing to keep an eye on in this area, however, is that CRE is still carrying some residual risk. The maturity pipeline is chock full of loans scheduled to mature that in some markets have property values that remain 35% below 2007 levels. Many loans scheduled to mature in 2013 and 2014 remain underwater, so modifying or extending them will continue to take work for your lending team. The economy remains slow to recover and some borrowers are still having trouble, so loan repayment capacity is likely to remain spotty. As such, remain vigilant to avoid taking credit losses as legacy loans come up for maturity.
Things are improving, but risks still remain, so vigilance is warranted. Just knowing when a customer's loan is coming due and their updated financial condition (plus the situation with their industry and market conditions) will help protect your bank. Now, if you could only figure out what you want to eat for dinner tonight before you show up at the store and start shopping.
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