US banks sink on concerns about office real estate loans

Shares of large and mid-sized US banks sharply underperformed the broader market on Wednesday with the S&P 500 Banks Index closing down 2.0 per cent while the benchmark S&P 500 Index fell 0.6 per cent with worries about commercial real estate loans in focus among bank investors.

Investors worried about potential losses among banks from office real estate loans after comments from executives, including Wells Fargo & Co Chief Executive Officer Charlie Scharf and Blackstone President Jonathan Gray at a Sanford C Bernstein investor conference.

Scharf said on Wednesday there will be losses in the office loan sector and that the bank was proactively managing its portfolio while he looked to reassure investors that it is not “overly concentrated” in that area.

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Gray talked about “unprecedented weakness” in older office buildings while noting that this segment currently makes up less than 2 per cent of company’s equity portfolio in real estate.

“Vacancy is 20-plus percent, rents are declining, companies now are obviously thinking about their space needs in light of remote work and the economic climate that’s ahead. Lenders are reluctant to have exposure to office buildings. Buyers are reluctant. Valuations are going down,” Gray said, according to a transcript from the Bernstein conference.

But Gray still estimated that “office buildings are about 3 per cent of the US banking system” so the size of losses, “relative to what happened in the housing market 15 years ago is dramatically different.”

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Rick Meckler, partner at Cherry Lane Investments, a family investment office in New Vernon, New Jersey, said “continued concern over loans made to the office market” hurt bank stocks broadly on Wednesday, citing the Wells Fargo comments.

“The implication is that there are those that will suffer even if Wells Fargo is diversified enough,” Meckler said.

Wells Fargo ended the session down 2.9 per cent  while Morgan Stanley dropped 2 per cent and Bank of America fell 1.7 per cent . Goldman Sachs and JPMorgan Chase & Co lost 1.3 per cent and Citigroup shares closed down 0.9 per cent. Blackstone shares ended down 0.9 per cent.

Regional lenders came under more pressure with KeyCorp falling 5.9 per cent, as the biggest decliner in the S&P bank index, followed by Zions’ 5.6 per cent drop and Citizens Financial’s 5 per cent decline.

Also on Wednesday, the Federal Deposit Insurance Corporation said US banks’ total deposits declined by a record 2.5 per cent in the first quarter.

Hurting the broader market as well as bank stocks were jitters ahead of a lawmakers vote on a deal to raise the US debt ceiling and unexpectedly strong labor market data that reinforced bets for more Federal Reserve interest rate hikes.

With inputs from agencies

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