U.S. banks’ construction loan delinquencies increased 23.8% in the first quarter
US bank construction loan delinquencies increased in the first quarter in absolute and relative terms, while bank construction loan outstanding as a percentage of total loans declined for the fourth consecutive quarter.
The COVID-19 pandemic, which hit much of the United States towards the end of the quarter, has forced many developers to close or delay their projects, in some cases amid government-imposed work stoppages . While the months in which the impact of the virus was most severe are not included in the data, many individual lenders said on earnings calls that their construction books are well structured to withstand a downturn.
Total overdue construction loan volume on bank balance sheets reached $ 3.67 billion in the quarter, up 23.8% from the fourth quarter of 2019 and 24.6% year-on-year , according to data from S&P Global Market Intelligence. Defaulted loans represented 0.97% of total non-residential construction loans, up from 0.78% a quarter earlier, while the percentage of residential construction loans that were past due rose to 1.07% against 0.97% in the previous quarter.
Banks continued to phase out construction loans, with construction loans accounting for 3.37% of total loans and leases, up from 3.44% in the previous quarter and 3.49% a year earlier.
Wells Fargo & Co. had the largest nominal construction exposure among U.S. banks in the first quarter, with $ 19.42 billion in loans, mostly in commercial real estate. Construction loans, however, represented a relatively small amount of 1.89% of the bank’s total loans and leases. The banks with the largest share of construction loans, among the top 20 lenders, were OZK Bank, where construction accounted for 35.00% of total loans and leases, and PacWest Bancorp, where it accounted for 15.53%. .
At a June 10 conference, Wells Fargo CFO John Shrewsberry said more than 90% of the loans in its approximately $ 150 billion commercial real estate portfolio, which includes construction, have a loan ratio. / value less than 70%.
“We will have losses,” he said. “We’re going to have people who just can’t do it. But the way we underwrite it, the way we serve it, the clients we select, in general, for our commercial real estate business, we expect to perform well throughout the cycle. “
US Bancorp, the second-largest construction lender for the quarter, at $ 10.60 billion, has “really gone upmarket and focused on stronger sponsors” in its commercial real estate business since the last downturn, said Credit manager Mark Runkel said in an April 15 report. call.
CFO Terrance Dolan added that the bank has tightened its construction loan underwriting and reduced exposure to the segment over the past two years, in anticipation of a further downturn.
Executives at Bank OZK also said in March that the bank’s concentrations in commercial real estate and construction have trended downward over time due to the growth of its indirect lending business and community bank. Later, on an April 24 earnings conference call, Chief Executive Officer George Gleason said the bank’s construction loans typically have terms in which borrowers guarantee they will complete their projects within on time and in a timely manner. “
Still, he acknowledged that some real estate sectors, such as travel and recreation, have suffered particularly severe damage from the coronavirus.
“Most of these properties, if you finish a property today, you’re probably not starting operations,” he said. “You’re probably just putting this project on the back burner for a month or two or three, until economic conditions improve to restart it.”