Commercial Real Estate Woes Continue to Dog Lenders : Banking: Standard & Poor’s says the ‘overhang’ of losses retards credit rating increases for the industry.

Banks are being held back from possible upgrades in credit ratings because of the current depressed commercial real estate market despite progress in reducing sour loans, according to Standard & Poor’s Corp.

S&P; said Tuesday that the recent bankruptcy filing by real estate giant Olympia & York Developments Ltd. was a stark reminder of the severe problems still plaguing commercial real estate.

Banks will need to continue accounting for real estate losses, which dampen profitability and weigh on their ratings, the bond rating agency said.

“While non-performing commercial real estate loans are leveling off, and the quarterly inflow into that category is diminishing, the overhang of heavy loan losses should retard rating increases for the banking industry,” said S&P; analyst Tanya Azarchs, writing in a special report.

Azarchs said Southwestern states such as Texas and Arizona were among the most hard-pressed areas, where a lengthy regional recession and depressed real estate will bruise banks’ ratings.

Banks with a lot of land in their real estate portfolios tend to suffer more than others because land, which does not produce income, goes through broad value swings.

S&P; said that at some of the worst-hit Texas banks, 40% of the real estate portfolios are non-performing.

Nationally, excluding Texas, S&P; expects the overall rate of non-performing loans to be in the 15% range.

The next hardest-hit area, S&P; said, is New England, where cumulative losses are 7% to 8% of loans outstanding.

In New England, the Bank of Boston has non-performing loans of 16%. New York City banks have non-performing levels reaching 40%.

Non-performing levels in the Midwest and Southeast, excluding Florida, are much more moderate than in the East and Southwest. S&P; said those areas have not taken heavy provisions to build reserves but have high capital levels “so that real estate losses could be handled with relatively little strain.”

Regarding banks’ ratings, S&P; said they will be held back if the level of non-performing loans, or loans that are not being paid back, rises above an average of about 25% of those outstanding, a level S&P; called “manageable” in the current market environment.