Wells Fargo exec sees the most loan stress in older office buildings

By Steve Gelsi

Financial stocks and bonds sell off after comments from Wells' CFO and Pimco real estate head

A Wells Fargo & Co. executive said Tuesday the bank is seeing loan stress in older office buildings as the financial world grapples with lower real-estate values for working space as employees continue working from home.

"Older office buildings that are not renovated in certain areas of different cities, you know, are the places that you're seeing the most stress," said Michael Santomassimo, chief financial officer of Wells Fargo (WFC), at the Morgan Stanley U.S. Financials, Payments and CRE Conference.

The office-space market is broken up into several subsectors, many of which are doing well, he said.

Smaller, owner-occupied buildings are holding up, and newer areas such as Hudson Yards in New York City continue to thrive, he said.

"Where the issues are, really the institutional office space and, you know, it's a wide range of outcomes now," he said. "You go to Times Square in New York City, not doing as well."

Financial stocks were the third-weakest out of 10 subsectors of the S&P 500 SPX on Tuesday, as the broad stock market dropped.

Meanwhile, John Murray, managing director and portfolio manager who heads the global private commercial real-estate team at Pimco, said in an interview with Bloomberg that he sees more U.S. regional-bank failures ahead as workers stay home and demand for office space remains slack.

Lending institutions face about $441 billion in property loan maturities this year, he said.

"As stressed loans grow due to maturities ... we expect that banks will start selling these more challenged loans to reduce their troubled loan exposures," Murray said.

Higher-for-longer interest rates are also challenging borrowers with increased costs of loans. This in turn is impacting demand for fresh loans.

Pimco has been buying commercial-real-estate loans from larger U.S. banks for about 18 months, Murray told Bloomberg.

He doesn't expect a systemic failure from commercial real estate because larger bankers reduced their exposure after the 2008-09 financial crisis.

Meanwhile, the Federal Deposit Insurance Co. said last month in its quarterly bank update that its list of problem banks has increased by 11 banks, to 63 banks over the previous quarter.

The FDIC said the number of problem banks amounts to 1.4% of total banks, "which was within the normal range for non-crisis periods of one to two percent of all banks."

Assets held by problem banks totaled $82.1 billion, up $15.8 billion.

Commercial-real-estate exposure was cited by Moody's last week as it placed six banks on review for potential debt downgrades: First Merchants Corp. (FRME), F.N.B. Corp. (FNB), Fulton Financial Corp. (FULT), Old National Bancorp (ONB), Peapack-Gladstone Financial Corp. (PGC) and WaFd Inc. (WAFD).

Also read: Banks' office-loan exposure remains a 'mixed bag' as lenders manage through downturn

Wells Fargo's stock (WFC) fell 2.3% and is down for six of the past seven days, according to Dow Jones Market Data. The stock has gained 15% in the year to date, outperforming the S&P 500's SPX 12% gain.

Regional bank bonds, meanwhile, have also been under pressure and saw net buying over the last 30 days, as the following chart from data solutions provider BondCliq Media Services shows. The bulk of the selling was of bonds issued by KeyCorp Inc.

The next chart shows the banks' outstanding bonds by maturity bucket.

Spreads, meanwhile, have been widening of late, although they remain off their widest point of the year.

-Steve Gelsi

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06-11-24 1234ET

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