We see three reasons why we do not expect further trouble for the global banking sector—or global stocks—as a whole. (Shutterstock)

A number of banks have experienced large share price falls in recent times, the result of investor concerns over their exposure to US commercial real estate.


Last week, the US-based New York Community Bancorp and Japan’s Aozora Bank reported challenges with some of their US property loans. Moody’s placed the former’s credit ratings on review for a downgrade, while the latter warned of a net loss of JPY 28bn and cut dividends by 50% for the current fiscal year.


These stock-specific stories fed through into share price action and moves for the broader US regional banking sector. Shares of New York Community Bancorp fell 42%, Japan’s Aozora Bank lost 33%, and the S&P Regional Banks Select Industry Index declined 7.4% on the week. In comparison, the weekly gains of the S&P 500 and Nikkei 225 indexes were 1.4% and 1.1%, respectively.


But we think that investors should set these challenges in their proper context. Without taking single-name views, we see three reasons why we do not expect further trouble for the global banking sector—or global stocks—as a whole:


Commercial real estate exposure is sharply in focus—and well managed—for most US banks. Commercial real estate, especially in the US office sector, has been top of mind for bank managers and regulators since the pandemic. Since early last year, banks have provided greater detail on their exposures to assuage investor and lawmaker concerns over concentration and asset quality risks. Actions taken so far mean that US banks’ loan exposure to the office segment looks manageable to us, representing around 2% of average total loans at large banks and around 4% at small and mid-sized banks.


While we acknowledge the risks of further deterioration in the commercial real estate sector and the potential hits to banks’ earnings between 2024 and 2026, we do not expect any meaningful bank capital deterioration or for office loan challenges to spread into other sectors of US commercial lending. And there may be some encouraging macroeconomic signs ahead. The fourth-quarter Senior Loan Officers Survey from the Federal Reserve notes that while banks continued to tighten lending standards to businesses of all sizes, the share of banks doing so declined relative to the third quarter, potentially indicating a slight improvement in credit availability.


Japan’s overall financial sector is insulated from US office challenges. Japan’s mega- and regional banks have limited exposure to non-recourse US real estate loans. In their December results, the three largest banks reported net income growth year-over-year and little impact from commercial real estate. Those loans they do hold are predominantly high-quality assets and subject to rigorous risk management, in our view. While Japan’s largest insurers are more exposed to the weakest pockets of US commercial real estate, they have already disclosed risks or projection of losses for the second half of this year in their fiscal second-quarter results. Any losses should be manageable, in our view, with potential positive surprises on income helping to offset capital depreciation pressures.


European banks have far lower commercial real estate exposures—and risks should be manageable. European banks have on average about 6% of their loan book in commercial real estate—which, when measured as a percentage of CET1 capital, is significantly less than the US banks, especially the smaller and mid-sized banks. Data from JLL also points to a very different office landscape: European vacancy rates of around 8% at the end of the third quarter of 2023 contrast with a 21% rate in North America. While refinancing risks remain for expiring commercial real estate loans, we think pressures will ease as European central banks cut rates as expected through 2024.


So, we do not think that recent newsflow on US commercial real estate loans should prompt lasting investor concerns about systemic banking risks or financial market contagion. We do see several key risks remaining for markets, most notably conflicts in the Middle East and between Russia and Ukraine, as well as strained relations between the US and China.


While we acknowledge there is no “one-size-fits-all” form of protection against all market risks, we see a range of strategies that can help dampen portfolio swings or limit peak-to-trough changes in portfolios. These include seeking quality in both equity and bond holdings, as well as defensive structured strategies, alternative investments, or positions in oil and gold.


With thanks to Bradley Ball, Sacha Holderegger, Chisa Kobayashi, and Jennifer Stahmer (UBS Chief Investment Office) for their contributions.