Factbox: U.S. banks increase reserves for commercial real estate exposure

First Financial Bankshares

21/07/2023 16:09

By Matt Tracy
       July 20 (Reuters) - The U.S. commercial property market
has faced severe challenges since the pandemic due to lingering
office vacancies, diminished retail activity and higher interest
rates. That stress has caused banks and other lenders to tighten
their standards for new loans and scrutinize existing ones. 
    While regional banks carry the greatest exposure to the
commercial real estate (CRE) sector, second quarter earnings
show that a number of big banks have prepared for potential
defaults, primarily on office loans.
    Here are the highlights across the sector:
    
    BANK OF AMERICA CORP  BAC.N :
    Chief Financial Officer Alastair Borthwick said the bank had
$17 million in charge-offs, or debt owed to a bank that is
unlikely to be recovered, on its office loan exposure during the
second quarter versus $15 million in the first quarter. The
value of assets under review for credit risk rose by $1.7
billion from the first quarter, due mainly to its CRE exposure.
However, Borthwick noted the bank's office CRE exposure was low
relative to its overall loan portfolio, at 2%.
    
    GOLDMAN SACHS GROUP INC  GS.N 
    The investment bank reported about $305 million in net
losses within a private portfolio, driven by markdowns on office
CRE, it said. The Wall Street giant also said its debt
investment revenue of $197 million had declined year-on-year due
primarily to "weaker performance" in its real estate
investments.
    Goldman Sachs Group CFO Denis Coleman said the bank's
provision for credit losses stood at $615 million in the second
quarter. CRE loans represented just 15% of the bank's overall
lending book, while only 1% of the CRE loan portfolio was
office-related.
    
    JPMORGAN CHASE & CO  JPM.N  
    While its CRE revenue grew to $806 million in the second
quarter from $642 million in the first, JPMorgan reported $1.1
billion in credit loss provisions driven by its office
portfolio. While the portfolio was "quite small", Chief
Financial Officer Jeremy Barnum told investors the bank
increased provisions "to what felt like a comfortable coverage
ratio."
    
    WELLS FARGO  WFC.N 
    The bank said it had a $949 million increase in its
allowance for credit losses, primarily CRE office loans. 
    At the same time, it saw a quarter-on-quarter rise in CRE
revenue as a result of higher interest rates and loan balances. 
    "While we haven't seen significant losses in our office
portfolio to-date, we are reserving for the weakness that we
expect to play out," CEO Charlie Scharf said.
    
    CITIZENS FINANCIAL SERVICES  CZFS.O  
    Citizens' nonaccrual loans - those on which a payment hasn't
been made for 90 days - grew by $195 million to roughly $1.2
billion, while its net charge-offs increased by $19 million to
$152 million. Both increases were driven largely by the bank's
CRE holdings.
    Citizens recorded a credit loss provision of $176 million in
the second quarter. It increased its allowance for credit losses
to $2.04 billion from $2.01 billion at the end of the first
quarter, which included $41 million in connection with its
general office portfolio. 
    "We believe losses are manageable and readily absorbed by
reserves," Bruce Van Saun, Citizen's CEO, told investors.
    
    EAST WEST BANCORP  EWBC.O  
    The bank highlighted that its CRE portfolio had a low
average loan-to-value (LTV) ratio of 61%, a key metric used to
determine the credit risk of a loan. East West's office
portfolio had a weighted average LTV of 52%. 
    While almost three-quarters of the bank's office loans are
to borrowers in the troubled California market, it noted a "high
percentage" of its CRE loans carry full recourse and personal
guarantees from individuals with "substantial net worth." 
    "All of these characteristics help to keep this portfolio
strong," Dominic Ng, East West's chairman and CEO, said.
    
    FIFTH THIRD BANCORP  FITB.O 
    The regional bank's allowance for credit losses increased
0.09% from the first quarter to $2.53 billion, due in part to a
0.27% increased allowance for its commercial mortgage loans. 
    Fifth Third's nonperforming CRE loans declined to 0.13% in
the second quarter from 0.29% in the first quarter. Its
percentage of CRE loans at least 30 days delinquent grew to
0.29% from 0.04%.
   "We have limited office exposure," Fifth Third CFO James
Leonard told investors Thursday, noting the bank "had
deemphasized office even before the pandemic."
    
    MORGAN STANLEY  MS.N  
    The investment bank said provisions for credit losses in the
second quarter amounted to $97 million versus $82 million the
same period last year, primarily driven by deterioration in CRE.
    
    WEBSTER FINANCIAL CORP  WBS.N 
    The regional bank's nonperforming CRE loans ticked up to
$47.9 million last quarter from $35.8 million in the first
quarter. 
    Meanwhile, it divested $80 million in CRE loans last
quarter, "the vast majority of which were secured by office
properties," resulting in $13 million in charge-offs, Webster
CFO Glenn MacInnes told investors. The bank reduced its office
exposure by 25% over the last four quarters with a "minimal hit
to capital," CEO John Ciulla said.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
U.S. banks highlight office real estate as next big worry   
 urn:newsml:reuters.com:*:nL1N36E243
ANALYSIS-Banks step up U.S property loan tweaks to limit
defaults     urn:newsml:reuters.com:*:nL1N38U02T
ANALYSIS-Overexposed US regional banks could sell commercial
property loans     urn:newsml:reuters.com:*:nL1N37F0AD
ANALYSIS-Small U.S. banks imperiled by big office loans   
 urn:newsml:reuters.com:*:nL4N35U35G
Office CRE in US at risk from rising interest rates, work from
home - Moody's     urn:newsml:reuters.com:*:nL4N38C3MN
Fed's Powell sees no broad threats from commercial real estate
lending     urn:newsml:reuters.com:*:nL1N3862R3
FOCUS-'Treasuries on steroids': U.S. banks' mortgage bond
trading bonanza     urn:newsml:reuters.com:*:nL1N2GY2B3
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Matt Tracy; editing by Michelle Price and Nick
Zieminski)
 ((Matt.Tracy@thomsonreuters.com;))