Wells Fargo And JPMorgan Prepare For Losses On Office Loans

(CTN News) – A pair of major banks, including JPMorgan Chase and Wells Fargo, announced on Friday that they had set aside more money for expected losses associated with commercial real estate loans, the latest indication that the sector is feeling the strain.

In particular, lenders’ exposure to commercial real estate has come under some scrutiny this year, as the sector globally – particularly office buildings – has been under pressure as a result of high interest rates and the fact that workers have continued to stay at home.

As a result of its office loan portfolio, Wells JPMorgan Fargo reported higher losses in CRE. A total of $949 million was added to its allowance for credit losses as a result of the increase.

However, the bank said its commercial real estate revenue also increased quarter-over-quarter to $1.33 billion as a result of higher interest rates as well as higher loan balances.

The Wells Fargo CEO Charlie Scharf said that while the company has not seen significant losses in its office portfolio to date, it is planning for the weakness that we expect to show over the long term in the market.

JPMorgan’s CRE revenue in the second quarter increased by $806 million from $642 million in the first quarter. As of the end of the quarter, JPMorgan had a revenue of $806 million.

As a result of the bank’s acquisition of First Republic Bank in May, it has reported a credit loss provision of $1.1 billion, largely due to its office portfolio, which accounted for four out of five of the bank’s credit losses.

Although JPMorgan’s office portfolio is “quite small,” its CFO, Jeremy Barnum, told investors the bank has decided to grow there a little bit in order to reach what feels like a comfortable coverage ratio.

In its annual stress tests conducted last month, the Federal Reserve painted a more positive picture of the banks’ CRE exposure, with projected losses in the event of a market crash declining slightly compared to last year.

However, most office and downtown commercial real estate loans are held by smaller regional and community banks, which are not subject to the same capital buffer requirements.

CRE JPMorgan risk has been closely monitored by regulators, particularly at banks with high ratios of such loans to their total capital. In addition, lenders have worked with customers to prevent defaults.

Property values have declined and interest rates have increased, which has resulted in higher refinancing costs for CRE borrowers.

The maturity of some $20 billion in office commercial mortgage-backed securities, which bundle together individual loans, is set for 2023, according to Trepp, a provider of real estate data.

According to a JPMorgan report by McKinsey Global Institute, the value of office properties could decline by $800 billion across nine major US cities over the next seven years.

SEE ALSO:

MasterCard Partners With MENA-Focused Nirvana To Provide Payment Solutions