Mon Oct 12, 2009 5:32pm EDT
By Elinor Comlay - Analysis
NEW YORK (Reuters) - The next big headache for banks is likely to be commercial real estate and analysts expect big losses and another wave of bank failures to result.
Banks held about $1.7 trillion in commercial real estate loans at the end of September, according to Federal Reserve data, or about 15 percent of their total assets. But to the extent these loans weaken, small banks are likely to be hit the hardest because larger banks are better diversified.
The banks that analysts say could risk big losses include Salt Lake City's Zions Bancorp (ZION.O), Columbus, Georgia- based Synovus Financial Corp (SNV.N) and Dallas-based Comerica Inc (CMA.N).
But it is not just earnings that are at stake -- bank failures could surge in the coming quarters.
"The serenity of the quiet closure of two to three banks per week is soon going to come to an end," said George Ball, chairman of Sanders Morris Harris Group, an investment bank and investment adviser, in Houston.
Banking regulator the Federal Deposit Insurance Corporation had 416 banks on its watch list of problem banks at the end of the second quarter and veteran analyst Dick Bove at Rochdale Securities expects another few hundred will fail in the next few quarters.
The FDIC closed Chicago-based Corus Bank on September 11, following losses on commercial real estate and condominium developments in Arizona, California, Florida and Nevada.
At Warren Bank in Michigan -- closed on October 2 by the FDIC -- almost 40 percent of its $395 million in total loans were in commercial real estate.
"Real estate lending has long been the specialty of Warren Bank," the company still claims on its website.
Analysts are worried banks such as Corus and Warren Bank may be just the first of a coming wave of bank failures due to commercial mortgages.
Banks have been slow to recognize losses from commercial mortgages to forestall posting big losses, preferring to alter loan terms in the hope an improving economy will keep the loans from heading south, a phenomenon widely known as "extend and pretend."
"It takes a long time for an actively rented commercial real estate space to get to a point where a bank can't be flexible in terms of conditions and has to start writing it down," said Tom Mitchell, analyst at Miller Tabak & Co.
Banks may set aside larger amounts of money to cover losses in the fourth quarter, when banks consult with auditors over their results, Mitchell said.
When commercial real estate makes up a large portion of a bank's balance sheet, the bank is at risk of being forced to set aside much more money for losses.
At Zions, commercial real estate accounted for almost 35 percent of its $41.6 billion in loans at the end of the second quarter, while Synovus had almost 28 percent of its $28 billion loan portfolio in commercial real estate. Comerica's commercial real estate loans made up about 22 percent of its loan portfolio.
But while regulators stepped in to prop up large banks suffering from residential mortgage losses, they are not expected to help out small regional banks suffering commercial real estate losses since these are not seen as a threat to the wider financial system.
"The system will survive but with more cuts and bruises. We're going to see quite a lot of consolidation," said Marshall Front, chairman of Front Barnett Associates in Chicago.
"It's not pretty and there's not a lot of relief out there for these banks."
(Reporting by Elinor Comlay; editing by Andre Grenon)
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