It’s clear that COVID-19 is having a massive effect on the financial services industry. As a result, it is imperative that financial institutions have visibility into their Commercial Real Estate (CRE) portfolios to monitor and reduce their exposure to risk. When state lockdowns began in March, requiring the shuttering of physical business locations, many commercial tenants were unable to make lease payments. Because tenants must miss several payments before they are considered delinquent, many lenders will not have a clear picture of risk or exposure until it is too late to respond. This forces many financial institutions to manually sort through their portfolio, guess which accounts might be impacted, and forecast financial models and losses. A better path forward combines improved policies with user-centric technology. With proactive insights, financial institutions can offer their clients support proactively, rather than waiting until payments are delinquent and the options to help are more limited.
That path begins by implementing the following strategies:
1. Identify the impact.
As the crisis evolves, certain demographics, sectors and geographies will emerge as “hot spots”. The sooner a financial institution can address these, the better. Financial institutions can utilize an efficient Commercial Real Estate (CRE) Solution to track demographics on properties and tenants.
When it comes to national retailers, not all stores will feel the same impacts. For example, a nonessential business like a sporting goods store will feel a greater impact from closures than a grocery store. By proactively addressing and reporting relevant information, financial institutions can stress particular properties through multi-variate sensitivity and advise their customers accordingly.
2. Assess portfolio health by looking at potential impacts.
Financial institutions must be able to stress properties on both macro and micro factors. Multi-variate sensitivity analysis allows banks and credit unions to stress a property to see what would happen to net operating income if vacancy rates increase.
By stressing properties and providing proactive communication on short and long-term impacts, both the financial institution and the borrower can benefit.
3. Aggregate exposure across the portfolio.
Adopting technology that can automatically populate data models when tenant information is entered, enables financial institutions to run reports that give insight into how both borrowers and tenants might be affected by a company going out of businesses. This powerful insight can guide relationship managers as they reach out to the borrowers to help form a new plan of action.
As market conditions continue to change, it is clear that legacy policies and systems cannot meet the needs of today’s markets. To remain competitive, financial institutions must quickly implement scalable and efficient ways to serve their clients, monitor economic impacts and protect their assets. They should also lean on innovative solutions that incorporate flexible data models and offer a deeper understanding of their portfolio to create stronger client relationships.
-Paul Clarkson, EVP, Community and Regional Banking, nCino