M&T Bank is feeling better about its commercial real estate loan portfolio as the recent fall in long-term interest rates has started to reduce pressure on the sector.
The regional bank is already seeing the benefits of lower rates, Chief Financial Officer Daryl Bible said at a Barclays conference Wednesday. He explained that M&T's watch list of "criticized" CRE loans has shrunk in recent weeks, a trend that could bode well for other banks with large exposures to the sector.
Borrowers in the CRE sector — whether they own apartments, retail buildings or offices — are more on track to repay their loans, reducing potential problems for the bank, Bible said.
M&T feels "really good" about the credit trends in its CRE portfolio, which makes up some 21% of the Buffalo, New York-based bank's loans, Bible said. The remainder of M&T's loans to businesses and consumers are also staying broadly healthy, he added.
"We had a good second quarter from [a] credit quality perspective," Bible said. "I know we're going to have a good third quarter. I believe fourth quarter is going to be strong as well."
The improvement in commercial real estate lending — a sector that has caused angst among investors and regulators — is largely due to recent moves in the bond market. Bond traders have gotten ahead of what they anticipate will be a series of rate cuts by the Federal Reserve, prompting long-term interest rates to fall.
The office loan market is facing some unique challenges, Bible noted Wednesday, with some buildings suffering from vacancies as companies rethink their post-COVID office footprints. But most of the stress in M&T's CRE portfolio over the last couple of years has been solely the result of higher interest rates, Bible said.
Some M&T clients are "now taking advantage" of the slide in interest rates, Bible said. Certain property owners who previously had shorter-term construction financing have now locked in longer-term loans at more attractive interest rates, whether from M&T or another lender.
That refinancing trend has resolved some of the loans that M&T was keeping a closer eye on, reducing the number of loans that could face trouble, according to Bible.
Once the Fed actually starts cutting short-term interest rates, M&T executives will "have a very black-and-white picture of how things go," Bible said. Many loans that are currently in the bank's bucket of criticized loans will suddenly get back on track, since lower interest rates will make it easier for borrowers to keep up with their payments.
If the Fed cuts rates from about 5.3% to 4.3% it will mean that "a lot of more loans come out of 'criticized' into 'performing status," Bible said. And if rates fall by 200 basis points, the vast majority of M&T's criticized loans would be "wiped out" and become performing, he noted.
The overall message Wednesday from the $209 billion-asset bank was "quite positive," Piper Sandler analyst Frank Schiraldi wrote in a note to clients, though he also noted that M&T is being hurt by a lack of loan growth.
Loan growth is lackluster largely because M&T's CRE book is "rolling down faster than anticipated," Schiraldi wrote, as borrowers find other financing options and pay off their loans.
The bank has been consciously scaling back its CRE footprint for years, seeking to reduce its concentration in the sector. The portfolio now makes up about 148% of its capital, down from 260% four years ago.
M&T is ready to expand a bit more in the CRE sector now that it's gotten "comfortable" with its lower concentration, Bible said Wednesday. The expansion would come as trickier conditions lead other banks to turn away business, limiting options for solid borrowers who want to grow.
"The loans you can make now in the CRE space are probably some of the best loans you could ever have in that space," Bible said. "So we want to be supportive of our communities and our clients in that marketplace."
