A grim outlook for Wells Fargo’s commercial loan portfolio


Wells Fargo had previously publicly signaled that its credit outlook deteriorated significantly between March and June. Still, the company gave investors a shake on Tuesday in addition to doubling its expected future losses on commercial loans, reflecting its belief that there will be no rapid economic recovery after the coronavirus pandemic.

The San Francisco bank reported weaker loan performance across a range of sectors, particularly the energy sector, but also real estate and construction. In the commercial real estate sector, loans to hotels and shopping centers performed particularly well.

Wells now predicts that commercial real estate prices will fall by around 10% to 15%, and that the declines will be larger for some industries that have been hit by the virus-induced changes in consumer behavior. Such price cuts could be particularly painful for Wells, which is the nation’s largest commercial real estate lender.

“Since the start of the pandemic, we have worked to help clients on a case-by-case basis. We have continued with our strict routine monitoring process to identify problems early, ”CFO John Shrewsberry said on a call with analysts. “However, these are unprecedented times.”

The weaker-than-expected outlook for commercial loan performance was among several threads in the company’s quarterly earnings report that worried investors. Shares of the $ 1.95 trillion asset bank, which have fallen more than 50% since the start of the year, fell another 4.6% on Tuesday.

Wells, who previously announced plans to cut its quarterly dividend, said it would cut the payment from 51 cents per common share to just 10 cents. The scandal-ridden bank has also set aside an additional $ 765 million to pay to customers who have been harmed in various ways by its past actions.

Wells Fargo’s allowance for credit losses reached $ 20.4 billion, up $ 8.4 billion from just three months earlier, with commercial loans accounting for 76% of the increase. In total, the company reported a quarterly loss of $ 2.4 billion, after reporting net profit of $ 6.2 billion in the prior year period. This is the bank’s first quarterly loss since 2008.

For months, CEO Charlie Scharf has signaled he’s preparing to ax Wells Fargo’s spending base, and he reinforced that post on Tuesday.

“Our spending is at least $ 10 billion more than it should be,” he said on the call with analysts, “and there is no reason why it should be. And so we do the work to create a roadmap for the business that is much more effective. ”

The company then clarified that Scharf was referring to potential spending cuts of $ 10 billion per year, which would represent about 18.5% of the company’s normal non-interest spending on an annual basis. Reducing spending by this amount would mean significant reductions in the bank’s 260,000 employees.

It would also likely mean a lot more branch closures than previously discussed publicly. Wells, which had 6,300 branches in 2014 and now has fewer than 5,500, previously set a goal of reducing that number to 5,000 by the end of 2020. But Shrewsberry said Tuesday that the end goal rather than 4,000 branches.

“This is in part what we learned during the pandemic about where transactions are going and how best to serve customers,” he said on a call with reporters. “And some is for other reasons.”

During the previous call with analysts, Shrewsberry was asked about the Wells Fargo project recent decision to buy $ 14 billion in delinquent government guaranteed mortgages, which is far more than any other lender has bought since the start of the pandemic.

He said Wells would bear the accounting consequences of owning the loans whether or not she bought them back from the Ginnie Mae pools, which was factored into his decision making. And he said Wells has yet to decide whether to continue to buy back large volumes of mortgages that have been forborne.

Wells’ non-performing assets fell from $ 6.4 billion at the end of March to $ 7.8 billion three months later. About two-thirds of this increase was attributable to loans in the oil and gas sector, while almost all of the remainder was attributable to other commercial loans.

Shrewsberry said he expects imputation rates to continue rising in the first half of next year before they start to stabilize.

In the consumer sector, loan performance was supported by various government stimulus programs, including cash payments to US households and expanded unemployment insurance.

But that was a different story in the business world. Shrewsberry downplayed the impact of the $ 660 billion paycheck protection program on loan performance, saying many companies that got help through Wells Fargo were quite small and noting that the program was designed to keep employees on the payroll.

Shrewsberry also suggested that the recently opened Main Street Loan Program, a government-backed initiative to help large businesses, is likely to be plagued by weak demand for loans. “Most of the eligible borrowers would be mid-sized private companies who wouldn’t know how to handicap whether it was good or bad for them to be in partnership with the Federal Reserve,” he told reporters. “It seems to be what’s going on. “

JPMorgan Chase, which also released its second quarter results on Tuesday, did not increase its commercial loan portfolio reserves as much as Wells Fargo. Still, the Bank of New York has indicated that more commercial borrowers now appear likely to default on their loans than they appeared to be three months ago.

“I would say that in the first quarter, when we were really looking at a deep but short-lived downturn, we were really very focused on the areas that were most affected,” JPMorgan CFO Jennifer Piepszak said at a call with analysts. “And now that we are looking at a more protracted downturn, we are set aside for a much wider impact across all sectors.”

Allissa Kline contributed to this story.


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