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At St. Louis banks, commercial real estate risk looks low

30 August 2016

(St. Louis Business Journal) 

Eddie Vigil, an analyst at Argent Capital Management who follows community banks, said he looks especially close at the CRE loans that have been made for construction and land development, the work done before the property produces income. “That’s where the risk is. Construction and land development is speculation,” he said. Of the $11.8 billion in CRE loans in St. Louis, $1.7 billion is in that category, up from $1.6 billion a year earlier.

August 26, 2016 (Dilip Vishwanat)

Regulators at the Federal Reserve Bank of St. Louis have said they are watching commercial real estate lending to make sure it doesn’t get out of whack, like lending did in the years leading up to the financial collapse.

On that score, St. Louis banks look pretty good on the whole.

Commercial real estate (CRE) lending — non-residential property such as stores, malls, office buildings and industrial parks — is a good thing, as it reflects the strength and vibrancy of the business economy. And it’s especially welcome in St. Louis, where loan demand has been tepid for a long time.

The Fed wants to make sure, however, that it doesn’t become a balance-sheet risk. CRE loans totaled $11.8 billion at St. Louis banks as of June 30, up 10 percent from $10.7 billion a year earlier. At 76 St. Louis banks with less than $10 billion in assets, CRE loans as a percentage of risk-based capital increased to 223.12 percent from 220.9 percent in the second quarter of 2015.

Eddie Vigil, an analyst at Argent Capital Management who follows community banks, said he looks especially close at the CRE loans that have been made for construction and land development, the work done before the property produces income. “That’s where the risk is. Construction and land development is speculation,” he said. Of the $11.8 billion in CRE loans in St. Louis, $1.7 billion is in that category, up from $1.6 billion a year earlier.

CRE loans that are not secured by commercial property and are more risky total only $63 million, a small fraction of total CRE lending. “And most St. Louis banks have zero loans in that category. They’re pretty much doing what they should be doing,” Vigil said.

In addition, CRE lending is growing because competition for those loans is stiff, rates are low and companies can restructure their balance sheets with CRE loans. “In the eight years since 2008, companies have paid down debt — including CRE — they haven’t been expanding, and their CRE properties have appreciated, and they owe less on them,” Vigil said. “So why wouldn’t they use that under-leveraged real estate to improve cash flow or take equity out for whatever projects they want to do?”

Other key measurements at St. Louis banks were a mixed bag through the first half of the year in comparison with banks nationally. The banks based here with less that $10 billion in assets had an average Texas ratio of 8.05 percent through the second quarter, outperforming similarly sized U.S. banks, which averaged 8.19 percent. Nonperforming assets as a percentage of total assets averaged 1.36 percent, the same as national peers.

However, return on average assets at the 76 St. Louis-based banks with less than $10 billion in assets lagged the U.S. average, at 0.82 percent, compared with 1.04 percent nationally. “That confirms that St. Louis is still lending less than other regions,” Vigil said.

The 77 total banks based in St. Louis reported net income of almost $277 million in the first half, compared with $222 million last year at 80 banks. The total number of banks dropped as a result of mergers.