Big Banks Shake Off CRE Jitters, Cut Loss Reserves And Raise AI Hopes

The clouds of debt maturities and nonperforming loans haven’t entirely cleared from the country’s largest banks, but the shine of artificial intelligence and data center development is erasing the shadows cast by Wall Street's anxieties over pandemic-era loans.

AI dominated the conversation across earnings calls for five of the country’s largest banks Tuesday as concerns about commercial mortgage quality and delinquencies from the bygone era of ultralow interest rates faded into the background.

"The issues of the moment, whether it's real estate four or five years ago or whether it was private capital lending and all this stuff, just aren't surfacing the way people thought they would," Bank of America CEO Brian Moynihan said. 

Major banks spent several quarters whittling down their CRE portfolios after pandemic-era loans tipped into delinquency and ate into reserves. Now it seems they're ready to move past those troubled times.

JPMorgan Chase, Goldman Sachs, Bank of America, Citigroup and Wells Fargo all blew past analyst expectations in second-quarter earnings released Tuesday, posting results that suggest the institutions are cruising through the choppy macroeconomic waters with big investments in AI and data centers. 

Banks are gaining confidence and cutting the provisions for credit losses that cover their entire loan books against the strong earnings and what looks to be a resilient real estate sales landscape. Transaction volumes bounced back in May following an April collapse in activity.

Goldman Sachs cut its already modest $315M in provisions for credit losses in the first quarter by 38% to $102M at the end of June, the largest shift as a percentage across all of the banks that reported results Tuesday. Bank of America and JPMorgan Chase also cut their PCL by more than 10% to $1.4B and $2.5B, respectively.

At Wells Fargo, allowance for credit losses ticked up modestly quarter-over-quarter to around 1.4% of loan volume but remained below the 1.6% of its total loan book a year earlier. 

That uptick would have been steeper if not for improvement across the bank’s real estate loan portfolio, Chief Financial Officer Mike Santomassimo said on the bank’s earnings call.

"Credit card and auto loan growth drove a modest increase in our allowance, which was largely offset by a lower allowance for commercial real estate office loans," he said. 

Even before the U.S. war with Iran shuttered the Strait of Hormuz and sent energy prices soaring, President Donald Trump’s whipsaw tariff regime and expansive deportation campaign weighed on the domestic economy.

The trillions of dollars being pledged toward AI are acting as a counterbalance, but so is a global economic reordering, JPMorgan Chief Financial Officer Jeremy Barnum said. 

"It's not just AI. You're talking about global infrastructure, the remilitarization of the world, the restructuring of trade is taking place, the enormous need of governments," Barnum said. 

JPMorgan posted a 41% jump in profits to $21.2B in the second quarter. The investment bank, like most of its peers generally, doesn’t break out commercial real estate performance in its quarterly reporting, but it raised $1.9T in credit and capital across all of its business lines since the start of the year.  

Some on Wall Street have raised concerns about the possibility of an AI bubble, and power availability remains a major concern for the industry's continued expansion.

But Barnum told analysts on the call that the market for data center debt was getting more crowded, with some lenders willing to make more aggressive bets.

"The data center underwriting space is one that resonates with me as a kind of bellwether for what people are doing," Barnum said. "The key question is: What happens with power supply? What happens with tenants? It's a well-discussed thing, and we have a pretty precise framework to govern what we're willing to do."

The expansion of the AI investment cycle helped Goldman Sachs notch a record quarter, with net earnings at $6.3B, CEO David Solomon said. The investment giant ended the second quarter with $26B in real estate assets under supervision. The bank’s $40B in commercial real estate loans is up 21% from the prior year, a faster pace of growth than the 3% rate of its total $261B portfolio.

"More broadly, demand for private markets remains robust as clients deploy capital across credit, equity and real assets," Solomon said.

The runway for AI investment remains long, with the cycle still "in the relative early innings."

"This is creating significant opportunities for Goldman Sachs to provide structuring, financing, risk management and capital markets execution across both public and private markets," he said.

Data centers were the only asset class discussed at length on earnings calls Tuesday, but leadership at Wells Fargo and Bank of America did point to improvements in the broader commercial real estate debt landscape as a tailwind.

Bank of America completed "one of our strongest quarters ever," Moynihan said in a statement, with net income up 27% from a year earlier to $9.1B. 

Commercial credit provided solid returns in the second quarter for Bank of America that were offset by isolated losses in corporate and commercial lending. Improvements in the bank’s commercial real estate book helped push its criticized commercial loan exposure down by roughly $2.3B across the quarter. 

AI and data center development have created a whole ecosystem of demand, with corporate service providers and vendors to the AI firms growing alongside their AI-focused customers. That has created several entry points for investors looking for different levels of risk-adjusted exposure. 

"There is a wide range of risk that people are taking in the lending activities," Wells Fargo CEO Charlie Scharf said. "We are staying true to who we are in terms of what our risk tolerances are in the context of a growing franchise."

"We're doing the pieces of the transactions that we're comfortable with, that have the credit profile that we're used to underwriting," he added. "There are others that are willing to take more risks."