Commercial real estate is among the industries that financial service providers are worried about in terms of credit risk, according to a new survey by Deloitte.
Indeed credit risk has moved to the top of the risk management agenda, according to Deloitte's biennial survey on the state of risk management in the global financial services industry.
Twenty percent of the chief risk officers at financial institutions surveyed identified credit risk as the top risk they see increasing in importance for their business over the next two years. That was a plurality among 16 different risk categories. In 2018, only 3% saw credit risk as the top threat.
Credit risk was an even larger concern among banking respondents. Thirty-four percent of those surveyed listed credit risk as their top worry. Even more, 66%, believed that credit quality deterioration would be one of the three macrotrends that will increase the most in importance for their institutions over the next two years. That was a higher percentage than any other trend.
A large majority, 77% of banking respondents, said that credit risk measurement will be an extremely or very high priority for their institutions over the next two years. Yet, even more banking respondents, 86%, said they believed their institutions are extremely or very effective at managing credit risk.
Banking respondents said several areas of credit risk would be more challenging than they were in 2018. Besides commercial real estate, cited by 43% of respondents, up from 31% in 2018, they also listed collateral valuation (48%, up from 25% in 2018), commercial credit (48%, up from 16%), unsecured credit (43%, up from 20%) and leveraged lending (41%) as potentially troublesome areas of credit risk.
One CRE trend bothering the respondents is that it is unclear to what extent employees will return to the office or whether the move to remote work will become permanent for many, reducing the demand for office space over the long term.
The survey also suggests that financial institutions should consider reviewing their procedures for managing liquidity risk in light of the recent economic contraction and volatility to make sure they have an accurate view of the projected cash flow and liquidity shortfall across entities and businesses. Institutions should also consider reviewing their collateral management procedures to assess whether these measures are adequate to meet the challenges of determining the value, availability and eligibility of collateral during the pandemic, the survey also noted.
While CRE is a concern among lenders, some groups remain bullish on the sector. In Florida, for example, Valley Bank's commercial real estate lending has stayed extremely active despite the pandemic: Valley Bank's 2020 Florida CRE lending total, $847.3 million, surpassed 2019's $734.1 million.
"This has been a very strange recession around Florida, with some industries impacted significantly while others are thriving and doing quite well," commercial real estate lender Trey Korhn told GlobeSt.com.
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