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While commercial real estate loan delinquencies will increase, the $39 billion that banks have already set aside to cover losses should be enough to cover any impact to the system, Citi analysts said Friday.

In reaction to regional bank-stock losses following trouble with an office loan and a multi-family loan at New York Community Bancorp
Citi analysts said jitters in the sector appear to be overblown.

“Bottom line, while we do expect that commercial real estate delinquency rates will rise and losses will gradually accrue over the next several years, the level of losses that we envision is broadly in line with a normal cyclical downturn,” Citi economic analysts said.

Citi analysts reiterated buy ratings on Citizens Financial Group
which it upgraded from hold earlier this month.

M&T Bank Corp
and Citizens were highlighted by Citi analysts to “leverage our view that fears are currently overblown.”

Meanwhile, regional banks Popular Inc.
Comerica Inc.
First Horizon Corp.
and KeyCorp
will benefit from limited office exposure, analysts said.

The Citi research under the title, Global Multi-Asset Strategy, CRE: The Three Trillion Dollar Banking Question, said it expects bank losses to be well below those recorded during the Global Financial Crisis, when bank failures impacted several hundred institutions.

Analyst Jeffrey Berenbaum said banks have reserved $39 billion, or 1.4% of total commercial real estate loan balances, against potential related losses.

Delinquency rates on the office subsector are currently at 1.5%, while those for multi-family are at 0.4%. At these levels, banks could lose $5.5 billion on loans assuming a 50% recovery rate.

“Even if delinquency rates rise to the 6% level seen during the GFC, implying losses of up to $35 billion, the reserved amount would still be sufficient,” he said.

During the 1990s real estate crisis, commercial-real-estate charge-off rates peaked at 2%. The office component, which has been impacted as workers stay at home, is estimated at 20% of the total commercial real estate business.

“Despite recent revelations about commercial real estate (CRE) exposures at New York Community Bank, markets have remained somewhat sanguine about potential fallout from CRE to the banking system more broadly — and, in our view, the fundamentals look reasonably aligned with the market’s assessment,” said Citi analyst Nathan Sheets.

The larger, money center and regional banks have generally charged off CRE-related debt or set aside allowances on loans expected to sour, he said.

“While many small and mid-tier banks, which are particularly exposed to CRE, have not been as aggressive in reserving against exposures, their loans tend to have lower risk attributes — e.g., smaller balances, suburban locations,” Sheets said.

Citi analysts reiterated buy ratings on Citizens Financial Group
which it upgraded from hold earlier this month.

Also read: New York Community Bancorp led increase in loan-loss reserves by big regional banks as lenders brace for potential downturn

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