Performance of the US banking industry will continue to be weighed down by elevated losses from residential real estate exposure, according to Fitch Ratings.
Fitch estimates that the top 20 banks could incur aggregate losses in excess of $80 billion on home equity and one to four family portfolios over the next three years.
This estimate represents a loss rate of 5.1% on aggregate loans of $1.6 trillion, compared to a cumulative historical loss rate of 8.4% since 2008.
While Fitch expects further deterioration in residential loan portfolios, current ratings already reflect the assumption that losses will remain above historical levels for several years. Each bank’s ratings have a cushion above the base case losses outlined in today’s report. However, if losses in a bank’s home equity and/or one to four family portfolios start to approach Fitch’s stress scenario, its ratings would likely come under negative pressure.
US banks’ exposure to home equity loans is one of Fitch’s top concerns. Most of these loans are on bank balance sheets and are concentrated at the largest institutions. As a majority of them are subordinated, performance remains very much leveraged to further home price declines and potential principal reduction initiatives. Therefore, Fitch believes there is still a reasonable probability that losses in these portfolios could be material.
Large institutions with national portfolios generally tend to have worse credit measures than their regional peers. Fitch partially attributes this to acquired portfolios and looser underwriting standards in some cases. Often, the larger banks have more capital, reserves and earnings capacity to absorb higher losses.
According to Fitch’s Sustainable Home Price model, national home prices in the US may decline by approximately 8%-10%, in real terms, over the next several years. Mortgage delinquency rates have improved modestly from their peak in 2010 but remain elevated. Fitch expects delinquency measures to remain stagnant, as a reduction in new delinquencies has been tempered by a slowdown in foreclosure timelines and continued pressure on home prices.
For more see US Housing and Bank Balance Sheets