We are monitoring the credit implications of the ongoing developments within the global banking sector and other potential macro and credit ramifications.
In the wake of the failures of three sizable U.S. banks, market sentiment toward the banking industry is somewhat fragile. The steep increase in interest rates has also raised concern about the health of banks' commercial real estate (CRE) exposures. So far, bank credit costs have remained relatively benign, with only a modest uptick in provisions and allowance for loan losses in the first quarter. We expect credit costs to rise throughout this year--by how much will depend on the depth and duration of a potential recession. Our economists expect a shallow recession in the second half of the year but have also raised the chances of a harder landing.
For the U.S. banks we rate, we believe that most have manageable exposures to CRE (meaning they're not outsize compared to capital) and have sought to lower their exposure to the most vulnerable segments, such as office. For most rated banks, we believe it would take a broader asset class decline, with charge-offs rising well above normal levels, to put pressure on banks' credit quality
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The prospect of interest rates remaining higher for longer combined with declining property valuations will keep refinancing conditions strained for borrowers in the commercial real estate (CRE) sector. Secular shifts in demand that are weighing on rental growth and occupancy will likely pressure credit quality for rated REITs and commercial mortgage-backed securities (CMBS) for at least the next one to two years. Office real estate remains under intense pressure, as the more permanent adoption of hybrid work is slowing the recovery from low office utilization—adding to doubts about the viability of lower-quality assets.
Turmoil in the banking sector is tightening access to credit, as regional banks have outsized exposure to CRE, and we expect life insurers to remain a funding source.
We expect the pace of downgrades of issuers with meaningful exposure to office assets will accelerate in 2023 as challenging refinancing conditions at more
onerous terms will weigh on credit metrics and we expect overall delinquency
rates for CMBS loans to tick up in 2023.
U.S. and European banking sectors have seen significant volatility in the weeks since March 10, 2023. Two U.S. regional banks failed (Silicon Valley Bank and Signature Bank), one of the 30 global systemically important banks, Credit Suisse, lost its independence after a government-facilitated takeover by UBS, and market and depositor confidence in parts of the sector evaporated.
We take a look at some of investors' most pressing questions on CRE refinancing risks, both from a bank and a real estate investment trust (REIT)/real estate operating company (REOC) perspective.
The abrupt demise of Silicon Valley Bank (SVB) and Signature Bank, and UBS' hasty takeover of Credit Suisse (CS) are reminders of banks' sensitivity to confidence and liquidity.
Emergency liquidity measures by central banks and the expedited takeover have likely lowered the odds of broader banking system contagion, although the decision to write-off CS' AT1 bonds may contribute to a higher cost of capital for banks. Broader credit risks remain elevated.
U.S. bank failures are the latest episode of financial volatility partly brought about by rising interest rates. We think it unlikely that this episode will prevent policymakers from sticking to the task of taming inflation and expect rates to remain higher for longer.
We think it's likely financing conditions will continue to tighten and bring further episodes of credit market turbulence.
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It's too soon to assess the full impact of the fallout from the collapse of Silicon Valley Bank--but for now, we think the macro effects will be limited.
Although global markets saw heightened volatility from the suddenness of the largest bank failure since 2008, the U.S. government moved quickly to stem the damage from SVB's collapse. Markets remain in flux but have generally calmed.
Consumer confidence would be the macro channel most likely to be affected. Uncertainty about the way current events might play out and their duration could dampen spending and demand, leading to a steeper-than-expected slowdown.
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S&P Global Ratings believes that the temporary depegging of two major stablecoins following SVB's failure demonstrates inherent risks in these assets.
Stablecoins are crypto assets that are intended to maintain their value relative to a fiat currency.
Yet after SVB's collapse, U.S. Dollar Coin (USDC) and DAI temporarily lost their peg to the U.S. dollar by 13%, before subsequently rebounding.
Meanwhile, regulators closed down Signature Bank, a key lender to crypto businesses, which followed the liquidation of Silvergate Bank on March 8, 2023.
In our view, these events highlight the interconnectedness between the traditional and decentralized financial systems (TradFi and DeFi), and that contagion of risks has the potential to go both ways.
It remains to be seen whether the failure of SVB, Silvergate, and Signature Bank will affect the wider crypto ecosystem, particularly if other banks are reluctant to step in to serve it.
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