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'Not Out Of The Woods': Big Banks Skirt CRE Calamity For Now

The anticipated impact of commercial property loans on the books of the country’s banks has been the cause of much hand-wringing in the last year. But the first of the largest banks to report their first-quarter earnings have taken a smaller-than-expected hit. So far, anyway.

JPMorgan Chase, Wells Fargo, Citigroup and Goldman Sachs all reported their Q1 earnings in recent days, and while they delivered mixed results in some regards, commercial loans weren’t to blame for their shortfalls.

“Commercial real estate for large banks was definitely a nonevent in the first quarter,” S&P Global Ratings Financial Institutions Managing Director Stuart Plesser told Bisnow

More challenges lie ahead for banks with commercial real estate loan exposure.

That doesn’t mean there won’t be trouble, he said, just that it hasn’t reared its head yet.

“Everyone's expecting to see further losses in CRE,” Plesser said. “Q1 just wasn't the quarter, at least for these large banks, where that came into play.”

JPMorgan, the first out of the gate, posted a roughly $1.9B provision for credit losses in the quarter, well below the $2.7B analysts expected. It also released some reserves for loan losses instead of stockpiling them, as it did at this time last year. 

“We've got good reserves against office. We think the multifamily is fine,” CEO Jamie Dimon told investors on a Friday earnings call.

But he also cautioned that there are factors such as uncertainty over interest rates that could tank the bank’s best-laid plans for CRE and beyond. If rates were to rise, “all assets, every asset on the planet, including real estate,” would see its value decrease, he said. 

Dimon made these comments about two days after an inflation report that all but scuttled any hopes for an interest rate cut in the near future and even prompted one Federal Reserve governor to mention the possibility of further hikes.

Wells Fargo saw lower commercial net loan charge-offs in the first three months of 2024, a $131M decrease from the fourth quarter, Chief Financial Officer Mike Santomassimo told investors Friday. 

When people talk about commercial real estate, they are really talking about office, Santomassimo said on the call. Nonperforming CRE assets came down a bit, he added, as the bank charged off some loans that weren't replaced by other items.

Wells Fargo’s nonperforming assets were down $203M, or 2%, driven by lower levels of CRE nonaccrual loans, mainly from its office portfolio, according to a presentation during the bank's Q1 call.

“We did not see further deterioration in the performance of our CRE office portfolio versus the fourth quarter, and therefore, our expectations have not changed,” Santomassimo said.

Wells Fargo's CRE losses were elevated in the last quarter of 2023, and the bank had said that future losses on its CRE portfolio would be “uneven and episodic,” Moody’s Investors Service said in an April 12 report about the bank’s earnings results. 

JPMorgan Chase CEO Jamie Dimon

Wells Fargo's overall nonperforming assets reached $8.2B, an increase compared to $6.1B a year ago but a $203M decrease from the end of 2023. That decrease was driven by lower levels of commercial real estate nonaccrual loans, or loans no longer generating interest due to nonpayment, according to a release from Wells Fargo. The decrease was “predominantly in the office portfolio,” the company said. 

Goldman Sachs broke out its CRE exposure on a slide in its presentation to investors Monday, saying that 14.4% of all its loans are to commercial real estate, or $26B. Of those loans, $12B went to warehouses. About $1B was for office projects. 

“We moved early in actively risk-managing our CRE exposure,” Goldman Sachs Chief Financial Officer Dennis Coleman said on the call. 

The relative calm on big banks’ balance sheets aligns with warnings by Federal Reserve Chair Jerome Powell, who has repeatedly said this year that his institution is working with smaller regional banks to help protect against their exposure to CRE.

Larger banks can be considered less exposed because their CRE loans make up a smaller share of their overall book of loans than what is usually found at regional banks, Plesser said. 

Still, the higher levels of exposure to the kinds of massive office projects that now struggle to find tenants opens big banks up to risk. 

Regional banks, for the most part, have yet to report their Q1 earnings. Likely the most closely watched will be New York Community Bancorp, whose Q4 earnings call in January set off a stock slide that threatened the bank’s viability. NYCB has since announced a $1B capital infusion and shaken up its leadership multiple times, but analysts are still wary ahead of the bank’s planned April 26 call.

M&T Bank, one regional lender that has already issued its earnings, reported a slight increase in distressed office loans on its books, from $1.1B at the end of last year to $1.2B in the first quarter, Crain’s New York Business reported. Overall, however, the bank’s stressed commercial real estate loans dropped from 26.7% of its portfolio at the end of 2023 to 26.4% in the first quarter. 

“Definitely not out of the woods with CRE,” Chief Financial Officer Daryl Bible said on an earnings call Monday. “But we’re having some positive trends.”