Are Banks Reserving Enough for Commercial Real Estate Default Risk?

It's no secret that certain commercial real estate loans have become a lot riskier since the coronavirus pandemic emerged earlier this year. After all, the desire to prevent the spread of the virus has made traveling and staying in hotels, going to shopping malls, working in the office, and even regularly eating in restaurants a lot less attractive. Seeing the apparent risk, banks have been setting aside lots of cash to cover potential losses on loans to industries vulnerable to the pandemic.

While many appear to be thinking about it conservatively, and deferrals have come down significantly in the last few months, there is still lots of uncertainty regarding the credit risks of borrowers. If coronavirus cases rise to a level that pushes states into new stay-at-home orders, or if the pandemic permanently changes consumer behavior, these loan segments could be facing more trouble.

One of the main ways a bank can get into trouble is when loans default. So, investors should examine the total exposure of banks to these vulnerable industries, as well as look at how much banks are currently setting aside to cover losses. 

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Source Fool.com