As part of FT Alphaville’s ongoing reporting on commercial real estate, and because we’re always up for a challenge, we posed a series of questions to Wells Fargo on the topic.
Wells, primarily through its acquisition of Wachovia, has significant exposure to commercial real estate, both directly and through CMBS. Moreover, the company expects losses to continue rising on that portfolio, according to its chief executive John Stumpf.
As the WSJ reported:
[Stumpf] said the bank has used 21% of its credits for losses tied to some commercial and foreign loans from Wachovia Corp., which Wells Fargo purchased last year.
…Mr. Stumpf said Wells Fargo has used $2.2 billion of an available $10.4 billion in credits for losses from the most troubled of Wachovia’s commercial and foreign loans. Wells Fargo has a remaining $8.2 billion to cover future losses from the loans, which include mortgages tied to commercial properties like office buildings and housing developments.
Separately, Mr. Stumpf said he expects the bank’s levels of nonperforming loans, or loans that may become uncollectible, to increase.
Not surprisingly, analysts and investors have been clamouring for detail on the portfolio, while the blogosphere has been ablaze with stories questioning Wells’ financial stability (including this parish).
In response to FT Alphaville’s (several and detailed) questions, Wells’ PRs provided the following response (emphasis ours):
John Stumpf spoke last week at the Barclay’s Investor Conference and addressed the composition of our commercial real estate portfolio. I have inserted his comments at the bottom of this email. Also, I am sending you a link to the full webcast of the presentation and the accompanying slides (see pages 23 and 24 for the relevant commercial real estate data – portfolio composition by type and geography).
We do not have anyone available to participate in an interview, but I believe you will find the information I am sending addresses your primary questions.
As for Stumpf’s comment on CRE at the conference (which was also the source of the WSJ story referred to above):
We believe that our commercial real estate portfolio has fundamentally less risk than most commercial real estate portfolios in the industry. First of all, legacy Wells Fargo’s commercial real estate portfolio has focused on relationship-based lending and continued to benefit from our consistent management team and our underwriting expertise. That is one of the reasons why our loss rate on the legacy Wells Fargo side has been low relative to our peers.
Second, while Wachovia’s commercial real estate portfolio was higher risk, it was written down through purchase accounting adjustments at the close of the merger in December.
Third, our commercial real estate loans are primarily originated through two key channels. $77.8 billion are in the Wholesale Banking Group, which originates both larger and more complex commercial real estate loans in our Real Estate Lending Banking Group, while our middle market commercial real estate group and our commercial banking group originate loans to medium-sized customers. Then there is about $50 billion of commercial real estate loans that originate our Community Banking Group, and they are smaller and geographically diverse. Approximately half of these are owner-occupied.
Drilling down further into commercial real estate, you can see that it is well-diversified by property type and by geography. We believe we have the best credit risk management team for commercial real estate in the business, and this seasoned team is responsible for maintaining credit discipline. Their deep experience gained through managing through many — through several previous tough cycles will serve us all very well.
While losses throughout our commercial real estate portfolio are increasing from historically low levels, unlike the residential real estate market, and for that matter the commercial real estate market of the early ’90s, we are not dealing with an outsized, overbuilt market. While the size of our portfolio has remained relatively flat, reflecting lower demand, we continue to originate high-quality loans at improved terms and spreads.
If any of that sounds awfully familiar, it’s because some of it appeared verbatim in Wells (pre-recorded, natch) earnings call for the second quarter of 2009, only that time, CFO Howard Atkins was the mouthpiece.
Below are two pages of slides Stumpf presented at the conference – also known as pages 15 and 16 of the credit supplement to Wells’ Q2 09 results - and to which the remarks quoted above relate:
Old chart, no indication of whether those offices are all concentrated in Washington DC, or those retail units in New York, to say nothing at all of the bank’s derivatives exposure and repurchase risk – which is, frankly, the detail that matters.
Wells is no stranger no scrutiny, and its response is always the same: no comment, nothing to see here, move along. Result? More scrutiny, if not outright rumour and speculation.
Consider this anecdote from August 2008, as told by FT Alphaville:
Ed Najarian, a member of the bank analysis team at Merrill Lynch in New York…has gone to the trouble of ringing up all the large-cap regional banks ML covers to enquire about exposure to Fannie Mae and Freddie Mac.
An accompanying note to the (non-) entry for WFC – Wells Fargo - states: Management would not disclose FRE/FNM exposure; non-marketable bank stock on balance sheet is FHLB and Federal Reserve stock
The bank has been trading off its reputation for strong risk management, which helped it avoid some of the subprime-related excesses of its peers (undermined nonetheless by its purchase of Wachovia) and high-profile support from the likes of Warren Buffett.
Stumpf and his team want the market to take them at their word. We suspect the market would prefer to see the numbers.
Related links:
Are you managing your loan repurchase risk? – Davis Wright Tremaine LLP (PDF)