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Bankers Say Their CRE Lending Growth Likely Has Peaked

More Bank Executives Sound Note of Caution on Increasingly Competitive CRE Lending Business

While overall commercial real estate borrowing demand continues to increase, more banks this past quarter said they don't plan to increase exposure in the CRE category of their loan portfolios, saying increased competition from other banks and the Federal Reserve’s decision to hold interest rates, forcing banks to continue to compete on pricing, is making profitable lending difficult to achieve. 

During quarterly earnings conference calls in the past week, several bankers cited increasiing competition for borrowers, putting downward pressure on margins. In addition, credit standards have continued to loosen, a game bankers said they’re not as willing to continue playing. 

Richard Davis, chairman, president and CEO of U.S. Bancorp, flat out warned bank analysts not to expect CRE loan portfolios to continue growing a great deal. 

“The one area that we’re not growing right now is CRE,” Davis said. “It’s an area that we think has some undue risk in it. It’s a pretty overheated market in not just certain locations but the terms and the recourse/non-recourse decisions that some banks are making, and we’re not going to participate in that.” 

“We’ll probably hold our own and keep our market share, but that’s an area we’re going to keep particularly close eye on,” Davis said. 

Helping to drive that risk has been the growing number of lenders that have jumped into the market in the past few years. The added competition has made it more difficult for regulated banks to compete and keep up with their growth plans for this year, according to several bankers. 

Chicago-area based Wintrust Financial reported a 3 basis point drop in its CRE lending margin. While its overall CRE portfolio is still yielding about a 4% return, Wintrust is seeing the market repricing loans coming up for refinancing in the 3.5% to 3.6% range. 

“That is really something we don’t want to try to match,” said Edward Wehmer, president and CEO of Wintrust. “We will with existing customers and that is driving that [yield] down a bit. We’re trying to hold a line on commercial and CRE pricing." 

Wehmer added that he believes interest rates are going to stay low for some time. 

Even Bank of the Ozarks, a community bank based in Little Rock, Arkansas which has been growing and plans to continue growing its real estate lending, sounded a note of caution this past week. 

“We will continue add people as we add volume related to that, as well as people in underwriting and closing and other parts of the operation,” said George Gleason, CEO of Bank of the Ozarks. "However, we think we are getting in the later stages of a real estate credit cycle here, so we are being very defensive in what we are doing.” 

As an example, Gleason said the Bank of the Ozarks is beginning to require more equity from borrowers. 

“We want to be at lower leverage not higher leverage,” Gleason said. “We are just trying to get more defensively postured which we think is very prudent.” 

Multifamily was particularly singled out by bankers as being overheated. Chicago-based Private Bancorp grew its multifamily portfolio by more than $200 million in the past six months to end September at $704 million in total in that category. 

But, Larry Richman, its president and CEO, said it has probably turned down more business than it would have in the past.

By CoStar Group

Posted - 1 day ago

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