Office woes see US banks boost bad loan provisions

Plummeting office values are forcing Wall Street’s biggest banks to put more money aside to cover commercial real estate loan losses, with one finance chief saying his institution will not “punt issues down the road” in a tough market. Second-quarter results shine a light on how the loan books of some of the world’s largest banks are being affected by fast-falling values of real estate, particularly offices, and borrowers struggling to pay down their debt. McKinsey said earlier this month that as much as $800bn (£620bn) could be wiped off the value of office stock in nine global cities across the US, the UK and Asia between now and 2030. Wells Fargo’s provision for credit losses rose by $949m from a year ago to $1.7bn, said chief financial officer Mike Santomassimo, with most of that linked to office loans. Lending against offices accounts for some $33.1bn of the bank’s $154.3bn in outstanding commercial real estate loans. “The office market continues to be weak,” Santomassimo said, adding: “Our CRE teams are focused on surveillance and de-risking, which includes reducing exposures and closely monitoring at-risk loans.” He said: “We have properties that are experiencing increased vacancies where borrowers have decided to inject equity and make investments to improve the property even in cities with more difficult fundamentals. We also have properties that are well leased and performing, but borrowers need help refinancing. In those situations, we are working with borrowers to restructure, which in many cases includes some paydown in balance. There are also situations that result in a sale or workout of the asset.” Asked on an analyst call for more information on how the bank will now work with borrowers in trouble, Santomassimo said: “There are plenty of little structural enhancements you can make to feel better about it. And then there is also, in a lot of cases, getting some partial paydowns… I think you give people a bit more time to work through these sets of issues. We try really hard not to punt issues down the road, and so if there are real issues that we need to deal with, we try to deal with them in the moment. But there are a number of structural enhancements that we work on with borrowers to get ourselves comfortable that we are setting the loan up for success.” At Bank of America, the largest chunk of a $74.5bn commercial real estate loan book – a quarter, or a little over $18bn – is in offices. The biggest amount of those loans is due in 2024, at $6.3bn. Chief financial officer Alastair Borthwick said the bank registered charge-offs – effectively writing a loan off – of $70m relating to office loans in the second quarter, a leap from $15m in the first quarter. “Now, we continue to believe that the portfolio is well positioned and adequately reserved against the current conditions,” he added. The bank has compared its commercial real estate loan book at the end of the second quarter to that of the global financial crisis in the final quarter of 2009 – it now accounts for 12.5% of the total loan book, compared with 21.2% in the GFC. Provision for credit losses in Morgan Stanley’s institutional securities group rose to $97m in the second quarter from $82m a year ago. “The increase was driven by continued negative outlook for commercial real estate and modest portfolio growth,” said Sharon Yeshaya, chief financial officer. Net charge-offs stood at $30m and were “substantially all from a handful of specific loans from our corporate lending portfolio”, she added. JP Morgan chief financial officer Jeremy Barnum said the bank lodged credit costs of $489m over the quarter. Net charge-offs of $100m included $82m from the bank’s office real estate portfolio, with much of the reserve build of $389m driven by what Barnum called “updates to certain assumptions related to the office real estate market”. “When we talk about office, for example, our portfolio is quite small and our exposure to so-called urban dense office is even smaller,” he added. “The vast majority of our overall portfolio is multi-family lending so, as a result, our sample size of observed valuations on office properties is quite small. But we like to be ahead of the cycle, and based on everything we saw this quarter it just felt reasonable to build a little bit there to get to what felt like a comfortable coverage ratio.” To send feedback, e-mail tim.burke@eg.co.uk or tweet @_tim_burke or @EGPropertyNews Photo © Gerd Altmann/Pixabay