US banks' commercial real estate loan portfolios showed signs of increasing stress with total net charge-offs spiking in the second quarter.

Total commercial real estate (CRE) loan net charge-offs exploded 4,138.6% year over year to $1.17 billion in the second quarter, from just $27.7 million in the 2022 second quarter, according to S&P Global Market Intelligence data.

The CRE loans' total net charge-off rate inched up 18 basis points sequentially to 0.26% in the second quarter. That represented a 26 basis-point increase from the same period a year ago, and the highest charge-off rate since the fourth quarter of 2020.

CRE loan delinquencies rose as borrowers struggled to service increasingly expensive debt.

The delinquent CRE loan balance for banks totaled $18.21 billion in the second quarter, up 35.7% from $13.42 billion a year earlier. Delinquent CRE loans as a percentage of total CRE loans stood at 1.01%. Total CRE loans at US banks grew 5.2% year over year to $1.796 trillion.

Declining credit quality metrics in CRE lending pushed several banks to reduce their exposures to the sector by offloading loans related to the asset class, particularly office loans, in the second quarter.

More than 40% of respondents in S&P Global Market Intelligence's latest bank outlook survey said they expect commercial real estate credit quality to decline at their institutions over the next 12 months, up from 26.3% in the first quarter and 31.2% in the fourth quarter of 2022.

– Analyze commercial real estate exposure, delinquencies and risk-based capital coverage.  – Download a template to compare a bank's financials to industry aggregate totals. – Read some of the day's top news and insights from S&P Global Market Intelligence.

Capital One records largest CRE net charge-off balance

The net charge-off rate on Capital One Financial Corp.'s CRE loans surged by 780 basis points year over year to 8.1%. It also logged the highest CRE net charge-off balance in the analysis at $360.7 million.

Capital One also saw the highest yearly increase in net charge-off ratio for the CRE loan segment among the 20 institutions with the highest CRE NCOs.

After offloading about $6 billion of loans over the past few years, Capital One in a second-quarter earnings call detailed plans to reduce its exposure to the commercial office space through the potential sale of a portion of its $888 million office loan portfolio reclassified as "loans held for sale." The company's CRE loan delinquency ratio for the second quarter was only 0.2%.

Buffalo, NY-based M&T Bank Corp. logged the second-highest net charge-offs in the sector at $99.2 million. It posted a net loss rate of 1.3%, up 123 basis points year over year. The bank's total delinquent CRE loan balance as a percentage of its total CRE loans stood at 2.8%.

NCOs at multi-year highs across loan types

Almost all categories of loans — except farm and auto — logged sequential increases in net charge-off rates in the second quarter.

NCOs on credit cards at US banks were at their highest level since the third quarter of 2020.

The net charge-off rate for credit card loans ticked up 40 basis points quarter over quarter to 3.48%. In June, the average 30-plus-day credit card delinquency rate was at a two-year high for the six major card issuers in the US.

With record levels of household debt, many lenders expect further increases in credit card net charge-offs and delinquencies should unemployment levels rise in the latter part of the year.

The net charge-off rate on commercial & industrial loans (C&I) rose six basis points sequentially to 0.32% in the second quarter. At 0.04%, the net charge-off ratio on multifamily loans reached its highest level in two years.

Most credit quality metrics deteriorate

NCOs as a percentage of average loans and leases was 0.49%, up 26 basis points year over year. Total net charge-offs at US banks climbed to $14.87 billion in the second quarter.

Early-stage delinquencies increased 11% year over year to $54.82 billion as of June 30. Loans and leases past due 90 days or more also increased by approximately 33.7% to $17.11 billion in the second quarter.

Nonaccrual loans as a proportion of total loans and leases declined by two basis points to 0.47%.

Rising net charge-offs, increasing funding costs, and concerns about potential future credit deterioration led to increased provisions for credit losses at many US banks in the second quarter.