Wells Fargo CFO warns of commercial real estate weakness

Dive Brief:

• Wells Fargo CFO Michael P. Santomassimo said Tuesday that the company is continuing to grapple with potential losses related to its commercial real estate exposure, noting that office assets were of particular concern.

• While the company’s growing credit card business has been a bright spot, Wells Fargo is “spending a lot of time” thinking about CRE and may need to increase its reserves in connection with it, he said during a presentation at the Morgan Stanley conference this week. 

• “As more and more time goes by you get some more information and we can refine some of the dials in the model and as we refine those dials we’ll have to likely reserve a bit more to hopefully get ahead of whatever losses could come over time,” Santomassimo said, adding that this doesn’t mean the bank would lose money. 

Dive Insight:

Wells Fargo isn’t the only bank to be struggling with problem loans stemming from the slumping office market. In an interview on CNBC Monday Goldman Sachs CEO David Solomon said the company would disclose impairments on loans and equity investments tied to commercial real estate in the second quarter. Financial firms typically recognize loan defaults and falling valuations as write-downs, CNBC said.  

Wells Fargo’s first-quarter net income rose to $4.99 billion from $3.788 billion in the year earlier period but CEO Charlie Scharf also noted in April that delinquencies and net charge-offs continued to slowly increase during the first quarter, according to the company’s earnings release.

The bank’s provision for credit losses in first quarter included a $643 million increase in the allowance for credit losses reflecting an increase for commercial real estate loans, primarily office loans, as well as an increase for credit card and auto loans.

In aggregate Santomassimo on Tuesday said the company’s booked allowance could rise a little higher, “closer to a billion depending on where it all shakes out,” he said.  

Separately, the CFO was optimistic about the company’’s net interest income going ahead. The bank had earlier issued guidance for a 10% higher net interest income this year, more than the full-year 2022 level of $45 billion, according to a Reuters report.

Back in in April the company had been hopeful there’d be “upside” related to NII in the second half of the year, Santomassimo said. “As more time goes by we’re more and more confident that there will be some upside,” he said.