Wells Fargo Sheds Bad CRE Debt, But Troubled Apartment Loans Persist
Wells Fargo continues to whittle away at its pile of shaky office loans while beating earnings estimates, but Wall Street investors aren’t impressed.
The bank cut the value of its nonaccruing commercial real estate loans to $3.6B from $3.8B at the end of March, according to its Tuesday earnings call. Despite strong second-quarter performance metrics, Wells Fargo's stock was down more than 5% in early trading after it cut its forecast for net interest income across all business lines for the year.
The bank's total nonperforming assets fell 3% over the quarter to $8B, driven by a decline in commercial real estate nonaccrual loans.
Over the last year, Wells Fargo has cut a total of $765M from its balance of nonaccrual loans in its portfolio, driven primarily by declines in its office holdings and modest decreases across the retail sector and its construction loan business.
The bank had $46M in nonaccrual industrial loans at the end of the second quarter, up from $25M a year earlier, and it added $1M in nonaccruing debt from hotel loans over the same period. Apartments saw the largest increase, with Wells Fargo holding onto $378M in nonaccruing apartment loans out of $39B in loans for the segment, up from $28M a year earlier.
“Nonperforming assets declined 3% from the first quarter driven by lower commercial real estate nonaccrual loans, predominantly in the office portfolio,” Wells Fargo Chief Financial Officer Mike Santomassimo said on the bank’s earnings call Tuesday.
The bank also increased its total provision for credit losses by $73M from the prior quarter to just over $1B.
Wells Fargo declined to comment Tuesday.
“Our allowance for credit losses for loans increased modestly from the first quarter and our allowance coverage ratio for total loans has been relatively stable for the past five quarters as credit trends have remained fairly consistent even amid macroeconomic uncertainty,” Santomassimo said during the call.
The bank had $61M in net charge-offs on CRE loans in Q2, down from $95M during the prior quarter and a smaller portion of the total $247M in net charge-offs on loans the bank realized from March through June than seen in past quarters.
Santomassimo said he expected the bank to realize more losses, within forecasts, as the office sector finds a pricing floor.
“As we have said, it will take time for the office fundamentals to recover,” he said. “Valuations appear to be stabilizing and although we expect additional losses, they should be well within our expectations.”
Wells Fargo posted $21B in total revenue in the second quarter, with $5.5B in net income. It has repurchased $6B in common stock through the first half of the year and is planning to boost its third-quarter dividend.
The bank saw overall revenue decline 3% year-over-year in Q2, with banking revenue down 7% and commercial real estate revenue down 6%. The decline in CRE revenue partially reflected the bank’s sale of its nonagency third-party servicing segment to Trimont last quarter, but also reflected lower loan balances and declining interest rates, according to the bank’s earnings report.
“While there continue to be risks as we look forward, activity levels have remained consistent and our strong credit performance continues to point to the strength of our commercial and consumer customers’ financial position,” CEO Charlie Scharf said in a statement.
CORRECTION, JULY 15, 6:10 P.M. ET: This article previously misstated the size of Wells Fargo loan portfolio. Its total CRE loan book is $133B, including $3.6B in nonaccruing loans.
