US banks faced rising pressure from deteriorating commercial real estate credit quality, especially in office portfolios, during the third quarter.
Commercial real estate (CRE) became a cause of growing concern in the banking industry in 2023 as an enduring shift toward remote work depressed occupancy in office properties and CRE charge-offs surged in the second quarter. During the third quarter, some US banks reduced their exposure to office loans, increased allowances for credit losses and charged off office credits.
Nonperforming loans
Nonperforming loans (NPLs) increased for seven out of 11 banks with outstanding office exposure greater than $500 million during the third quarter, according to an S&P Global Market Intelligence analysis.
At Wells Fargo & Co., the largest office lender by volume, nonperforming office loans accounted for 35% of total NPLs. Office NPLs accounted for 8.7% of the company's total office loans, up from 4.6% in the second quarter.
PNC Financial Services Group Inc. was the only other bank in the group to report office NPLs greater than 30% of its total NPLs. The company's office NPLs represented 7.7% of its total office loans, up 4.4 percentage points from June 30.
NPLs in PNC's multi-tenant office CRE portfolio increased by $373 million even as total criticized loans in the office portfolio remained "essentially flat" during the third quarter, CFO Robert Reilly said during the company's third-quarter earnings call. PNC had reserves for 8.5% of its total office portfolio and 12.5% of its multi-tenant portfolio as of Sept. 30.
"Ultimately, we expect future losses on this portfolio, and we believe we have reserved against those potential losses accordingly," Reilly said.
Reducing office exposure
Just three of 15 US banks in an analysis of select banks with more than $500 million of outstanding office exposure as of Sept. 30 increased their exposure to the sector in the third quarter.
Wells Fargo had the largest office loan balance in the analysis at $32.2 billion, representing 3.4% of gross loans. The balance was down 2.7% from the second quarter.
After a $359 million quarter-over-quarter increase, Wells Fargo's office CRE allowance for credit losses rose to 7.9% of the company's office loans from 6.6% at the end of the second quarter.
Estimating office loan loss reserves has been difficult because there are not many trades happening yet in the sector, Wells Fargo CFO Michael Santomassimo said during the company's third-quarter earnings call.
"There's a few in certain cities, and they're all a little bit different in their complexion," he said. "So you still have somewhat limited information in price discovery in a lot of places."
Synovus Financial Corp. reported the largest decline in its outstanding office exposure, with a decline of 37% from the second quarter to $1.9 billion. The total represents 4.4% of gross loans. Excluding the company's sale of $1.2 billion in medical office building loans, Synovus reported no charge-offs in its office portfolio.
The proceeds from the sale will also help Synovus reach its goal of exceeding a 10% common equity Tier 1 capital ratio, said Chairman, President and CEO Kevin Blair on the company's quarterly earnings call.