Latest Global News | Even Banks in Asia-Pacific (APAC) on the Hook for US Office CRE: Fitch

That’s what “spread far and wide” means. During the US CRE bubble, yield-chasers not just in the US but globally gorged on invincible US CRE.

By Wolf Richter for WOLF STREET.

We talked a lot about how exposure to the massive losses in US commercial real estate has been spread far and wide, particularly exposure to the office sector of CRE that now faces a structural crisis that’s not just going to go away, but will have to be dealt with by demolishing older office towers and building something new, and by converting some older office towers at a high cost into residential buildings in cases where that’s even feasible.

But losses are spread far beyond US banks, as we have seen: CMBS holders, CLO holders, global investors, bond funds, pension funds, insurance companies, property REITs, mortgage REITs, PE firms, etc. And no one cares about them because they’re not banks; they’re just investors taking losses, and those investors got paid yield to take losses. It’s when banks take big losses that regulators and central banks sit up straight

US banks have taken losses on office CRE loans, and some US banks have disclosed some of those losses, and there will be more, and so their profits get hit, and their shares crash, and they slash dividends, and some smaller ones with heavy exposure to office CRE might be shut down, but that hasn’t happened yet.

And US CRE losses have spread to banks around the globe. Aozora Bank, a mid-sized Japanese bank, disclosed that it had nearly $2 billion in US office loans; and that it had booked heavy losses on these loans, and its shares plunged. The big Canadian banks have set aside capital to deal with the expected losses from their US CRE loans, and Canadian regulators have been talking about it. European banks too. Deutsche Bank AG got the ball rolling by more than quadrupling its loan loss provisions for US CRE.

So now there is Fitch Ratings discussing the losses on US CRE loans held by banks in the Asia-Pacific (APAC) region.

That’s what “spread far and wide” means. Because during the US CRE bubble, everyone chased yield and gorged on this debt backed by US office towers and other commercial properties in the invincible US CRE market.

Fitch Ratings released a report about US office CRE loans and other US property loans held by APAC banks that it rates, and it had some things to say about banks it doesn’t rate.

“The potential impact of exposure to troubled US CRE segments, particularly office and retail properties, was highlighted after Japan’s Aozora Bank reported a loss for 4Q23, due partly to bad loans associated with US real-estate lending,” Fitch Ratings said in its report.

But this stuff is spread so far and wide that “APAC banks’ exposure to US property, including CRE, is generally less than 2% of lending where publicly disclosed, though many banks do not break out the data.” OK, so we really don’t know and expect more surprises.

Shanghai Commercial Bank Limited: “Higher exposure to the US market accounted for 29% of loans (12% of assets) in June 2023, but the bank does not disclose what share of this is CRE-related,” Fitch said.

China CITIC Bank International Limited: “US exposures accounted for around 5% of loans (2.7% of assets) but similarly this is not all CRE,” Fitch said.

Macquarie Group Limited (Australia) “may have US exposure above the average for Fitch-rated banks in APAC, but this would be mostly in the less-troubled power and infrastructure segments through its asset management business,” Fitch said.

And then there’s this: “Some APAC financial institutions, including banks not rated by Fitch, potentially have US CRE exposure levels higher than the average for Fitch-rated APAC banks,” Fitch said.

And this: “For the small number of outliers in our APAC bank portfolio where US CRE exposures are significantly above average, the lending is generally to select clientele that have low loan-to-value (LTV) ratios, generally around (if not below) 50%. This ameliorates potential vulnerability to US CRE asset price declines. Moreover, banks may be lending against US CRE segments other than office properties – though Fitch also expects weakening across retail, hotel, multifamily and industrial properties through 2025,” it said

Among the banks in APAC that Fitch rates, exposure to US CRE “is generally low,” and it adds, “though there may be a small number of banks across the region where the risk of losses is greater.”

And this report by Fitch adds to the theme that US banks’ exposure to US office CRE and US CRE debt in general is not nearly as bad as initially feared because this debt that is now blowing up is held far and wide around the globe, with global investors and global banks on the hook, and the 4,000 US banks hold only a portion of it.

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.