Wells Fargo CEO talks credit tightening for commercial real estate

Wells Fargo's CEO Charlie Scharf gave insights into the San Francisco bank's preparations for a possible economic downturn that could hit commercial real estate. This sector is already struggling with higher interest rates, rising vacancies and anemic efforts to return to office following the pandemic.

Scharf said that he would continue to lend to all segments despite the tightening of credit in higher-risk segments.

Wells (NYSE WFC) put aside $1.21 Billion in the first quarter to cover anticipated credit losses. This is up from $787 M a year ago.

Scharf stated that 'our economic expectations, which were used to support allowances have not significantly changed'. We continue to assess the allowance's adequacy by looking at specific asset classes such as commercial real-estate.

Wells Fargo’s economics department said earlier this month that it expected a recession in the third quarter based on tighter lending conditions and higher interest rates by the Fed to combat inflation.

Scharf stated that, as we look to the future, we are closely watching customer behavior in order to get clues about how the economy is changing. Customer activity remains relatively high and delinquencies are low but increasing.

Scharf explained that there are pockets of risks, like commercial office real-estate, which may impact institutions in different ways. We're actively managing our exposures.

Wells Fargo exceeded Wall Street's expectations on Friday for both revenue and earnings in the first quarter. For the first quarter, Wells Fargo earned $4.9 billion or $1.23 a share. This is an increase of about 32% compared to the net income of $3.79 Billion, or 91 Cents per Share, for the first quarter last year.

Wells Fargo reported a first-quarter revenue of $20.73 Billion, up 17% from the $17.73 Billion in the same period last year.

Analysts expect Wells to generate $20.07 billion revenue and average $1.13 per share in earnings.

Wells stated that over two-thirds (63%) of its office loan portfolio is in its corporate investment bank business, and has been given to high-quality borrowers who are financing Class A real estate. The bank stated that refurbished newer properties could perform better, regardless of whether it is Class A or B property.

Mike Santomassimo is the chief financial officer at Wells Fargo. He said, "As it is with commercial real estate, every property is unique." We review our portfolio on a regular basis, loan by loan.

Santomassimo stated that he does not expect to see a lot more stress on the near term in terms of clients' current status or big problems with individual properties, but he did say that he expected some of it. Santomassimo said that the cities with the most weakness are San Francisco, L.A., and Seattle.

Scharf shared insights on other areas within the bank, and efforts being made to improve efficiency. Wells Fargo branch staff decreased by 9% in the first quarter compared to a year ago. As more customers conduct their banking online, the number of branches has decreased by 4%. Wells has continued to refurbish and renovate branch locations despite the cuts.

Wells exited the correspondent mortgage business in January, focusing its retail mortgages on its customers and underserved areas. Wells Fargo mortgage originations are down 3% compared to a year earlier and 55% compared to the fourth quarter. Wells Fargo is undergoing more changes to its large mortgage business. It was once the dominant player in this industry.

Scharf stated that the home loan business is inefficient today. We have a lot to do there.

Wells saw its customers withdraw their deposits, either to seek higher returns elsewhere or spend the money. The decrease in deposits was despite Silicon Valley Bank's failure and Signature Bank's failure, which sent many depositors away to Wells and banks considered to be too large to fail. Wells reported that the movement of deposits had largely ceased. Wells reported that average deposits have declined by 7% since a year earlier and by 2% from the fourth quarter.

Scharf stated that consumer finances were strong with an increase in purchases on debit and credit card issued by the bank, but that spending started to slow down late in the first-quarter. This could be due to more cautious consumers after the large bank failures of the first half of March or in the second quarter.

Santomassimo warned analysts not to overreact to the decline in consumer spending in the call.