June 21, 2024

Wells Fargo Sees Losses in Commercial Real Estate Loan Portfolio, Anticipates More in 2024

Wells Fargo
Courtesy of Wells Fargo

By Kate Snyder

Though commercial real estate wasn’t the only subject discussed during Wells Fargo’s recent earnings call, bank representatives noted the losses that its loan portfolio experienced in the fourth quarter of 2023. The firm saw an increase in commercial net loan charge-offs that reflected the higher losses in the office market, however losses in the rest of the bank’s commercial portfolio were reported to be stable from 2023’s third quarter. 

During the earnings call, Mike Santomassimo, chief financial officer at Wells Fargo, presented details on the current state of its commercial real estate loan portfolio and what the firm anticipates to see in the future.

“As expected, losses started to materialize in our commercial real estate office portfolio as market fundamentals remained weak,” Santomassimo said. “The losses were across a number of loans spread across various markets and were driven by borrower performance, lower appraisals were the result of properties or loans being sold at a loss.”

Overall, Wells Fargo’s net income for the fourth quarter of 2023 was $3.4 billion, or $0.86 per diluted common share, Santomassimo said. The banking firm’s fourth quarter results included $1.9 billion, or $0.40 per share, for the FDIC special assessment and $1.1 billion of severance expense, including $969 million, or $0.20 per share, for planned actions. These expenses were partially offset by $621 million, or $0.17 per share, of discrete tax benefits related to the resolution of prior period tax matters.

The firm’s net loan charge-offs jumped 17 basis points from the third quarter to 53 basis points in the fourth quarter for average loans, which Santomassimo said was driven by commercial real estate office and credit card loans. According to the firm’s presentation deck, commercial net loan charge-offs were up $284 million from the third quarter. Nonperforming assets were also up $264 million, or 3 percent, in an increase that was driven by higher commercial real estate nonaccrual loans.

Last year, Wells Fargo reported higher losses in commercial real estate due to its office loan portfolio and raised its allowance for credit losses by $949 million, according to previous reporting from The Registry. At the time, however, the bank also noted that its commercial real estate revenue increased to $1.33 billion quarter-over-quarter, which was primarily driven by higher interest rates and loan balances. In a Reuters report, Wells Fargo CEO Charlie Scharf acknowledged the anticipated market weakness and stated that they were reserving for the expected losses.

In the earnings call, Santomassimo reiterated Wells Fargo’s position on its portfolio reserves.

“We substantially built reserves for this portfolio throughout 2023 as criticized and nonperforming assets increased,” he said. “While we expect additional losses in the coming quarters given the market fundamentals, and capital markets and liquidity challenges in this sector, the amounts will likely be uneven and episodic. Our commercial real estate team has a rigorous monitoring process and continues to de-risk and reduce exposure, and we’re using this information to evaluate our allowance.”

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