if they get share price up they will issue equity For the big Canadian banks, gross impaired loans on U.S. commercial real estate represented 22% of total business and government impaired loans in the fourth quarter. That’s up from 17% in the third quarter, and 7.6% in the fourth quarter of 2022.
These stresses are likely to intensify, as the commercial real estate sector “remains under pressure globally amid higher refinancing risks and dropping valuations,” the report said.
Refinancing risks have increased due to higher interest rates, along with “the upcoming wave of debt maturities, tighter liquidity conditions and dropping property valuations,” the report noted — adding that in the U.S. alone, US$1.2 trillion of debt is set to mature in the next two years.
Given record-high vacancy rates in the office sector — which are unlikely to recede as hybrid work arrangements remain popular — commercial real estate valuations are likely to fall too, the report said.
“Against this backdrop, refinancing certain transactions, particularly in the office space, will likely require additional equity and/or restructuring. We also expect an increasing number of borrowers unable or unwilling to pay,” it said.
As a result, banks with exposure to the sector will likely face deteriorating credit quality too.
“In our view, many banks will need to make some downward revisions to property valuations and, as a result, incur higher provisions and loan losses,” the report said.
Beyond that, the deteriorating climate also poses a potential systemic risk, it warned.
“Given the renewed market pressure after the banking turmoil of last spring, we will continue to monitor closely any potential implications on depositor confidence and liquidity at banks,” it added.