Two major U.S. banks, Wells Fargo and Bank of America, reported increased write-offs of bad commercial real estate (CRE) loans in the third quarter, aiming to clear troubled debt from their books.
Wells Fargo’s CRE write-offs surged to $107 million, up from $16 million in the second quarter. Its problem CRE loans, those unlikely to be fully repaid, dropped 20% to $2.7 billion. Bank of America saw a similar trend, with write-offs rising to $105 million from $2 million, and troubled CRE loans falling 17% to $888 million.
Write-offs and problem loans: A linked trend
The rise in write-offs often coincides with a shrinking problem loan portfolio as banks resolve bad debt. Writing off a loan removes it from the bank’s problem loan totals, reducing overall risk exposure.
Despite these improvements, distress in the CRE sector remains high. The Federal Deposit Insurance Corp. reported that 3.08% of CRE loans at banks with over $250 billion in assets were past due or in nonaccrual status in the second quarter. While this figure has fallen for seven consecutive quarters, it still exceeds the pre-pandemic average of 0.59% by more than five times.
Banks employ multiple strategies to reduce problem loans
Write-offs are not banks’ only method for managing problem loans. The bank also sold some of these loans, though these figures cover all commercial loans, not just CRE.
JPMorgan Chase, the largest U.S. bank, does not separately report CRE problem loans. Its overall nonaccrual business loans slightly decreased to $4.8 billion.
Wells Fargo’s Chief Financial Officer, Michael Santomassimo, attributed the bank’s credit losses to individual borrower situations rather than a broader decline in credit quality. Both Wells Fargo and Bank of America reduced their reserves for future CRE losses, indicating expectations of lower losses ahead.
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Wells Fargo’s reserves now stand at $1.61 per $100 of CRE loans, down from $1.77 in the second quarter. Bank of America’s reserves fell to $1.14 per $100 from $1.28.
CRE lending trends vary across banks
While some banks reduce their CRE exposure, others increase it. Bank of America’s CRE loans grew nearly 6% to $75.2 billion, and JPMorgan’s CRE portfolio, the largest among the three, grew about 1% to $148.7 billion.
Wells Fargo, however, continued to shrink its CRE exposure, particularly in the office sector. Its office loans fell 7% to $18.6 billion, down more than 21% from a year earlier. The bank’s total CRE portfolio declined by about $1 billion to $132 billion.
Citigroup, which does not report CRE lending separately, grew its average loans by 3%. CEO Jane Fraser emphasized the bank’s commitment to supporting clients while remaining cautious about potential economic shifts.
Interest rates pose a significant risk for CRE borrowers. Higher rates, along with energy and fuel costs, strain parts of the economy, including CRE. The Federal Reserve’s benchmark rate increase to a range of 3.75% to 4% in September, and the 10-year Treasury yield topping 5.1%, add further pressure on borrowers facing refinancing challenges.
Bank of America’s Chief Financial Officer, Alastair Borthwick, noted that the bank’s commercial losses are already low and do not expect much further improvement. He expressed confidence in the bank’s position, stating, We feel good about 2027. We don’t necessarily see any change right now to the underlying credit quality, but it’s a really low number at this point.
