Best Cautions Banks About CRE Revs

The banking industry could be vulnerable to a downturn in commercial real estate markets, according to an A.M. Best report that shows banks generated 42% of their revenues from CRE lending.CRE lending has been growing at a 9%-10% annual rate for several years and CRE loans, including permanent and construction financing, constitute nearly 22% of total bank loans. In 2005, bank real estate income jumped 30.4% in dollar terms and accounted for a "staggering" 42.3% of total bank revenues, the insurance rating agency said. "With a plethora of anecdotal evidence pointing to a softening commercial real estate market, the potential adverse impact of increasing exposure by banks in this segment is not just on asset values, but also earnings and capital levels," the company said. "The concentration in the industry's real estate income is the most alarming element." Federal regulators have issued proposed guidance that would establish thresholds on CRE exposures that could trigger a higher level of risk management as well as higher capital requirements.