August 7, 2023
Main Street Monday – C&I Loan Default Rates are at 12.5% & CRE Loan Defaults Reach 20%
Last week, Coleman Report streamed the fourth of a series of webinars, “Navigating the New Banking Landscape: Strategies and Solutions”. Jon Winick, Christopher Marinac, Edward Hida, and Jason Kuwayama came together to discuss the current state of the banking industry, historical data, and future expectations.
Overall credit quality is showing some weakness. According to July 2023 data, retail properties are seeing a delinquency rate of 6.25%. The delinquency rate for lodging properties is 5.81%, and office properties have a delinquency rate of 6.22%. C&I loans have a default rate of 12.5% according to the Federal Reserve Stress Test. Commercial real estate loans are notably higher with a default rate of 20%.
11% of consumer loans are floating rate while a vast majority of commercial loans are variable or have maturities meaning they are subject to servicing debt at higher payments. Commercial loans are either currently being hit with higher rates or they are going to be hit with higher rates. Broken down, 72% of C&I loans are variable, 73% of commercial construction loans are variable, and 57% of commercial mortgage loans are variable.
Loan growth has been continuing but at a slower pace. This trend of slower loan growth is expected to continue. Banks will be lending less too. During the webinar, Christopher Marinac shared that he believes the biggest banks and larger regional banks will be tightening credit standards the most.
Charge-offs and problem loans are up slightly, but it is not a major concern. Chris Marinac stated that not every loan is a bad loan. There are loan defaults that lead to additional collateral, additional cash from a borrower, and additional deposits. This allows the loan to be performing and work itself through. Loans can also be restructured. Sometimes issues with a loan can be resolved just through more collateral.