A litany of bankruptcies among retailers has many lenders on edge as they and others try to predict how much damage it could do to bank earnings — and how soon.

The rise of Amazon and other online commerce sites has reached a tipping point, and many retail competitors have thrown in the towel, especially apparel and general-merchandise stores. Just this year, retailers that have filed for bankruptcy or planned widespread store closings include American Apparel, Bebe Stores, HHGregg, J.C. Penney, The Limited, Payless Shoe Source and Wet Seal.

Then there’s the slow death spiral of legacy retail names like Sears and RadioShack.

“We’re seeing a fundamental shift in how consumers are behaving in a stable economy,” said Lynn Whitmore, managing director of retail finance at Wells Fargo. “It has to do more with how people are shopping, instead of them just not shopping anymore.”

Many equity and bond investors have debated whether the retail problem will be as bad for banks as the energy crisis of recent years. But just like with energy loans, banks don’t have to disclose details on retail lending, making it difficult to determine the impact, said Christopher Wolfe, a managing director at Fitch Ratings.

“Their data does not provide the granularity that you want, but we suspect it’s going to be an issue,” Wolfe said. “It’s going to be an earnings issue for banks, more than a capital issue.”

Other analysts are less concerned. Banks certainly will feel the effects of the retail downturn, but it’s unlikely to cause the kind of disruption as the energy downturn, Jason Goldberg, an analyst at Barclays, wrote in a recent report.

“Although ongoing secular pressures in the retail realm should definitely be monitored, we would be surprised to see a meaningful near-term uptick in retail-related credit losses,” Goldberg said.

Banks begin reporting first-quarter earnings this week, but it may not be until later this year when the toll of the retail crisis is felt on lenders’ income statements, said Doriana Gamboa, a senior director at Fitch. Moreover, banks probably have not caught up with the adjustments brick-and-mortar retailers have made to business models to compete with e-commerce, she said.

“I would say that the changes that retailers have made have not yet been incorporated into banks’ underwriting,” Gamboa said.

Some banks have avoided deterioration in credit quality of loans to retailers so far. The $30 billion-asset Synovus Financial in Columbus, Ga., had $354,000 in nonperforming loans to shopping centers at Dec. 31, unchanged from a year earlier, according to a regulatory filing. Synovus’ total lending to shopping centers rose 20% to $964 million in the same period.

But the wave of retail bankruptcies has raised concerns that the problems with shopping malls and big-box retailers could start to infect smaller retailers that are currently doing well.

“What happens at those bigger centers has implications for mom-and-pop stores,” said Phillip Bond, chief credit officer at the $7 billion-asset Farmers & Merchants Bank of Long Beach in California. “If the traffic counts at those centers go down, it can adversely impact mom-and-pop stores.”

Conversely, if a retailer goes out of business and vacates a big-box space, that can be an opportunity for a small business to move into nicer digs, Bond said.

Banks’ business with brick-and-mortar shopping centers is primarily in the form of commercial real estate and commercial-and-industrial loans. The largest CRE lenders to retail operators are the $35 billion-asset East West Bancorp in Los Angeles, the $63 billion-asset Zions Bancorp. in Salt Lake City and the $40 billion-asset People’s United Financial in Bridgeport, Conn., Barclays’ Goldberg said.

East West has about $3 billion in total commercial real estate loans to retailers, or about 12% of its total loan book, Goldberg said. However, East West has an average 51% loan-to-value ratio on its retail CRE loans, which should insulate it from losses, he said.

Other smaller players in the retail space give some details on their exposure. As of Dec. 31, shopping centers and mall buildings secured about $397 million of loans at the $22 billion-asset Texas Capital Bancshares in Dallas. That was about 7% of Texas Capital’s total CRE portfolio. At the $7 billion-asset BNC Bancorp in High Point, N.C., shopping centers and retail stores made up about 19.2% of its CRE book; BNC did not provide a total dollar amount.

The largest banks, like Wells Fargo, have exposure to both CRE and commercial-and-industrial loans to retailers. At Dec. 31, Wells Fargo had about 31 nonaccrual CRE loans to retailers on its books, totaling $10.9 billion, or about 1% of its loans, according to its annual report. Wells Fargo is also one of the largest asset-based lenders to Sears and was a major lender to Sports Authority, which filed for bankruptcy last year.

However, asset-based lending provides some protection to banks as the loans are secured by product inventory, accounts receivable and intellectual property like customer lists, Wells Fargo’s Whitmore said.

Many bankers have changed how they view the sector, said Bob Mahoney, CEO of the $2 billion-asset Belmont Savings Bank in Belmont, Mass. Belmont’s CRE exposure is primarily to offices and multifamily buildings, although those facilities will sometimes have retail on the ground floor.

“If they’re presented with a hardware concept or a furniture concept, then they’re not interested,” Mahoney said. “If it’s a massage studio or a hair salon, then they’re interested. It has to be something where you have to be there in person to get it.”

Some development companies have a track record of successfully converting a former retail store into space usable by other industries, Bond said.

“Medical offices, urgent-care centers, dental offices are all getting more interested in moving into big-box stores,” Bond said. “It does require some investment, however, with plumbing and HVAC and lighting upgrades. But the returns are worth it.”

Most big-box retail space also requires renovation to divide huge open rooms into smaller office space, Mahoney said. Even then, the buildings still are not conducive to office space, and empty space will remain unused in the rear of a building.

“Some of these big-box stores are in a long, skinny space with a lot of depth, so there’s a big part of it that’s not being renovated,” Mahoney said. “The new tenant isn’t using it and the bank isn’t getting paid for it. But it’s better than nothing at all.”

Fortunately for most banks, financing for the most troubled sector of the retail business — indoor malls — is largely the domain of real estate investment trusts. Garrick Brown, head of retail research at Cushman & Wakefield, estimated that the number of malls in the U.S. could fall to 850 in the next couple of years, down from about 1,150 currently.

Some malls have the potential to be converted into other uses, such as office space or multifamily housing, Brown. But the outlook for many other malls is dismal, and bankers should be thankful they won’t be on the hook when the wrecking ball comes, said Daniel Walker, CEO at F&M Bank of Long Beach.

“I would suggest that many of these malls will be leveled and replaced with housing,” Walker said.

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Andy Peters

Andy Peters

Andy Peters writes about regional banks, consumer finance and debt collections for American Banker.