Troubled property loans are still causing pain for the second-largest U.S. commercial real estate bank lender, offering an initial glimpse of the state of financial markets to begin 2025.
Wells Fargo is gradually charging off problem loans on office buildings, the San Francisco-based firm said Wednesday, as some of the nation’s biggest banks — JPMorgan Chase, Goldman Sachs and Citigroup — all reported profits to kick off earnings season. Regulatory reports expected later this month could include more details.
While JPMorgan, ranked as the largest U.S. commercial property lender, joined Goldman and Citigroup in not breaking out specifics on commercial real estate loans in these initial reports, Wells Fargo reported fourth-quarter net loan charge-offs grew from 0.24% to 0.3% in the third quarter. Wells Fargo said the gain in charge-offs, or loans written off as a loss, was driven by more unpaid commercial real estate debt, predominantly in its office portfolio.
In a bright spot, the bank also reported that nonperforming assets were down 5%, driven by lower commercial real estate nonaccrual loans, with $390 million of that decline tied to office properties.
Still, Wells Fargo’s chief financial officer, Michael Santomassimo, noted there are concerns to monitor.
“Commercial real estate office fundamentals have not changed and remain weak,” Santomassimo said during a conference call. “We still expect commercial real estate office losses to be lumpy as we continue to actively work with our clients.”
Wells Fargo declined to provide additional comment to CoStar News.
More losses expected
Banks still have a way to go in grappling with elevated levels of distressed office loans, according to S&P Global Market Intelligence in a Jan. 10 report.
“Losses will dribble in over the new few years,” S&P said.
Many of the biggest banks with significant exposure to the office market are equipped to deal with problem loans through charge-offs or restructurings, according to S&P.
“Large banks such as Wells Fargo, PNC Financial, Truist Financial and Citizens Financial have built reserves to 8% or more of their office portfolios,” S&P said.
A growing number of commercial mortgages in one specific category — loans on office buildings not occupied by the owner — have become delinquent, according to Bill Moreland, a partner at BankRegData, a tracker of industry financial data.
The largest banks are "aggressively ramping up loan modifications to lower payments to avoid delinquencies,” Moreland said in a research report this week.
In addition, major U.S. banks have been reducing commercial property loan exposure, particularly in their office portfolios, giving themselves additional buffers against potential losses.
For example, Wells Fargo’s commercial real estate loan balance ended the year at $136.5 billion. That is down from $141.4 billion in the third quarter and down nearly $35 billion from a year ago, the company reported.
Sign of recovery
Bond rating firm Morningstar DBRS published commentary this week that the office market is beginning to show signs of thawing.
"Glimmers of stabilization, led by AI-driven tech companies and a partial return to on-site work mandates, indicate that a gradual and uneven recovery may be underway,” Morningstar said. “While larger banks and regional institutions are both contending with asset quality stresses and charge-offs, many have strengthened their reserves and diversified their portfolios, positioning themselves to better weather ongoing uncertainties.”
The four reporting banks — Wells Fargo, JPMorgan Chase, Goldman Sachs and Citigroup — held $336 billion in commercial real estate loans going into the fourth quarter, accounting for about 12% of all such outstanding bank-held loans, according to Federal Deposit Insurance Corp. data.
More banks are scheduled to report fourth-quarter earnings in the coming weeks and could offer additional insight into the state of commercial real estate lending. Bank of America, PNC Financial and U.S. Bancorp are scheduled to release earnings Thursday.