Regional banks rebuild capital, but commercial real estate still shadows earnings

CHARLOTTE, N.C. — Regional banks have done the unglamorous work. Capital ratios are higher, deposit mixes are less skittish, and the existential headlines of 2023 have receded into case studies. What has not receded is commercial real estate, particularly office, which continues to throw off provisions, workouts, and the sort of management commentary that makes investors reach for a second cup of coffee.

The map is local. Sun Belt servicing economies and industrial-heavy books look like businesses. Central business district office in a handful of large metros still looks like a hope. Banks have extended, modified, and occasionally taken keys. They have not, in aggregate, marked a full cycle of distress through the income statement, because the cycle is taking its time.

That time is the enemy of a clean earnings multiple. Until the CRE overhang is either written down or grown out of, regional-bank stocks will trade as balance-sheet puzzles rather than as operating companies. Would-be acquirers know it. So do the boards that would rather not sell at a CRE discount.

Washington's mood is watchful rather than panicked. Supervisors want higher capital on the books that deserve it and fewer surprises in shared-national-credit reviews. They are not, for the moment, writing obituaries. That is progress. It is not a green light.