The nation's two largest bank lenders for commercial real estate are seeing the quality of their loans improve as office valuations stabilize.
JPMorgan Chase posted modest loan growth in the third quarter, while Wells Fargo keeps shrinking its property portfolio. The divergence between the two banks that emerged in the second quarter became more pronounced in the third quarter, according to the banks' earnings released Tuesday.
Wells Fargo sees the office market stabilizing, a pattern that is contributing to an improvement in commercial property lending. The office market has been slowly recovering from a lack of demand that hit during the pandemic five years ago, as employers adopted work-from-home protocols that contributed to reduced demand.
"Commercial net loan charge-offs were stable from the second quarter, with lower losses in our commercial and industrial loan portfolio largely offset by higher commercial real estate losses," Mike Santomassimo, chief financial officer of Wells Fargo, said on the firm's earnings call. "Office valuations continue to stabilize, and although we expect additional losses, which could be lumpy, they should be well within our expectations."
Wells Fargo reported $107 million in net charge-offs in the third quarter on commercial real estate loans on which they no longer expect to collect the full amount. That was up from $61 million in the second quarter but down from $184 million a year earlier.
Banks have been trying to scale back the amount of loans they have tied to office properties. Data from the Federal Reserve Bank of St. Louis shows that the overall portfolio of U.S. commercial real estate loans from large domestically chartered commercial banks has been shrinking since the first quarter of 2023. Banks are letting existing loans run off their books as office real estate remains stressed and under heightened regulatory scrutiny.
The loan balance of Wells Fargo's commercial real estate office portfolio declined 18% from a year earlier and about 33% from two years ago. It was driven by lower loan balances, the effect of lower interest rates in the quarter and reduced mortgage banking servicing income.
Reduced office lending welcomed
The decline in office lending is a positive development, Wells Fargo CEO Charlie Scharf said on the call, as the bank builds on its concerted effort to reduce loan risks tied to the property type.
"We're seeing good demand across a lot of the other portfolio," Scharf said. "And so, I think over a slightly longer period of time, you'll start to see" commercial real estate lending growth again.
Wells Fargo's commercial real estate loans on which it is uncertain of collecting full repayment, so-called nonaccrual loans, declined to $3.33 billion, or 2.56% of commercial real estate loans, from $3.57 billion, or 2.68%, in the second quarter.
Office nonaccrual loans dropped to $2.45 billion from $2.53 billion in the prior quarter and $3.53 billion a year earlier.
The bank's allowance for credit losses on commercial real estate fell to $2.97 billion, or 2.28% of commercial real estate loans, from $3.32 billion, or 2.5%, in the second quarter.
The office portfolio, considered the highest-risk segment, had reserve coverage of 7.5%, down from 7.9% in the prior quarter.
Wells Fargo reported commercial revenue of $1.19 billion from its commercial real estate loans outstanding, down 13% from $1.36 billion a year earlier.
Wells Fargo's period-end commercial real estate outstanding loan balance totaled $130.3 billion, down $2.3 billion, or 2%, from the second quarter and down $11.2 billion, or 8%, from a year earlier.
JPMorgan maintains steady growth
JPMorgan Chase's commercial real estate banking unit generated $901 million in revenue in the third quarter, up from $862 million in the second quarter but down from $960 million a year earlier. The bank's commercial real estate balances reached $146.5 billion at quarter-end, up 0.2% from the prior quarter and 1% year over year.
JPMorgan Chase does not break out commercial real estate charge-offs separately.
In discussing housing policy, JPMorgan Chase CEO Jamie Dimon called for reduced regulatory requirements on mortgage origination and servicing that were put in place after the 2008 financial crisis.
"We think you could reduce the cost of mortgages 30 or 40 basis points overall without creating any additional risk," Dimon said, noting what he considers excessive documentation requirements.
"That's, to me, the most obvious one" for government policy changes, he added.
Dimon also cited supply-side constraints including permitting delays, local zoning rules and lengthy approval processes as factors limiting residential construction.