Other bankers also said they expected to steer through the commercial real estate troubles, although many acknowledged that losses in the sector would rise.
"There's no doubt these are tough times for commercial real estate, and the risks are real," said Zions Chief Financial Officer Doyle Arnold, who predicted "elevated" loan losses for several quarters. "But we believe we can manage the risks better than anyone in the business."
Umpqua Chief Financial Officer Ronald L. Farnsworth said that despite analysts' worries, his bank expected only "small issues" from commercial real estate. He noted that the company used an analysis of rents charged at the buildings instead of their overall value when making the loans.
Cathay Chief Financial Officer Heng Chen said his company also made loans based on rental income rather than the appraised value of commercial properties.
"We are seeing some problems in commercial real estate, but hopefully it doesn't get much worse," Chen said.
City National Bank spokesman Cary Walker would not comment.
Bank analyst Mike Mayo said many of the assumptions used by banks in making commercial real estate loans were overly optimistic.
"While [residential] mortgage losses may be halfway to the peak, card and consumer losses may only be about one-third of the way, and industrial and commercial real estate problems (except construction) seem in the early stages," Mayo wrote in a recent report for Calyon Securities.
The contrast between the commercial loan-oriented regional banks and the more home-loan and consumer-oriented giant banks was apparent last week, when the government released the results of its stress tests on 19 banks with $100 billion or more in assets.
The list was topped by the small club of banks with assets exceeding $1 trillion -- Wells Fargo, Bank of America, JPMorgan Chase and Citigroup Inc. But it also included a number of large regional banks.
In assessing what two years of worsening recession would do to these banks, the Federal Reserve showed BofA and Wells Fargo with more than four times as much potential exposure to home lending losses as to commercial real estate losses.
The story was different at smaller banks. Fifth Third Bancorp of Cincinnati was exposed to slightly more potential losses on commercial real estate than on home loans. At Regions Financial Corp. of Birmingham, Ala., potential commercial real estate losses were more than twice as high as those predicted on home lending.
As such regional banks struggle with commercial loan losses, it's likely that some will be sold, said banking consultant Bert Ely of Alexandria, Va.
Several Southern California community banks already have failed in recent months as a result of exposure to construction lending. PFF Bank & Trust of Pomona, Alliance Bank of Culver City, 1st Centennial Bank of Redlands and First Heritage Bank of Newport Beach were shut down by regulators and taken over by healthier banks.
The trend of sales under fire is likely to continue, encouraged by bank regulators, said Sung Won Sohn, a former Wells Fargo chief economist and executive vice president who now teaches economics at Cal State Channel Islands.
"Southern California is over-banked," Sohn said.
--
scott.reckard@latimes.com
