The troubles in office lending that Wells Fargo warned about last year have started to emerge — a warning sign for regional banks with higher concentrations of loans on buildings that lease to white-collar industries.
The $1.9 trillion-asset bank charged off a chunk of its office-related commercial real estate loans during the fourth quarter as a post-COVID shift in work trends
San Francisco-based Wells had
"It's a long movie," Santomassimo said on the bank's fourth-quarter earnings call. "We're past the opening credits, but we're still in the beginning of the movie. So it's going to take some time for this to play out."
The bank has been sending out warnings for months, but thus far it hadn't seen a significant uptick in losses.
In the fourth quarter, however, Wells Fargo's net loan charge-offs rose to 0.53% of average loans, a figure that analysts said is healthy. Still, the ratio was up by 17 basis points from the third quarter. Losses on office loans, along with consumer credit cards, were responsible for much of the increase.
Future office-related losses will be "uneven and episodic" as individual properties come under stress, Santomassimo said. The various losses so far have resulted from "very specific situations," with few clear trends that cut across the bank's office portfolio. Losses were "pretty geographically dispersed across different cities" and parts of the country, he said.
Many properties suffered large write-downs due to new appraisals that pointed to sharply lower values, according to Santomassimo. "It was a substantial decline in what people thought the value of the properties was just a year or two ago," he said.
Still, Wells Fargo is not "seeing the stress spread to other parts" of its commercial real estate portfolio, he added. Some banks have flagged brewing troubles in multifamily loans and the
The ratings agency Fitch warned last month that it expected the commercial real estate sector to "continue to deteriorate through 2025." The weakening should occur across retail, hotel, multifamily and industrial properties, Fitch analysts wrote, but the deterioration will be largest in the office segment and at "non-trophy" shopping malls.
Office loans are seeing a "bifurcation," with properties in large central business districts, particularly older ones, experiencing more stress, according to the Fitch analysts. Higher interest rates and turnover as tenants fail to renew their leases have also presented challenges.
Loans on office buildings make up roughly 3% of Wells Fargo's loan book. Smaller banks are generally more concentrated in the sector.
Banks have a "tightrope to walk" as they work with borrowers in the office sector, said Sean Banerjee, the CEO of the digital loan trading platform ORSNN. Some office properties in cities like San Francisco, Chicago and Dallas are trading at half of their pre-COVID levels.
The good news is there's "just so much liquidity out there," Banerjee said. He explained that investors are sitting on large piles of cash that they can use to help figure out new funding structures for troubled properties — saving banks from having to charge off loans.
"If sponsors effectively are able to do anything from a recapitalization to outright take-out financing, then the bank won't lose a dollar," Banerjee said, though he noted that some properties may ultimately go into foreclosure.
Wells Fargo's stock price fell 3.2% to $47.45 on Friday. The shares of several regional banks also fell as investors remained wary over whether the economy — and thus banks' loan books — will run into some trouble this year.
Many investors stayed away from bank stocks in 2023 partly due to worries about loan books, and they didn't get a clear signal Friday that those worries are unfounded, said David Wagner, portfolio manager at Aptus Capital Advisors.
"The generalists aren't going to step in until there is some type of credit problem," Wagner said, referring to shareholders who invest in a broad set of asset classes, rather than mostly banks. "They're waiting for the all-clear."
