Big U.S. Banks Report Big Q3 Profits, Warn Of Future CRE Losses

Big banks posted hefty profits along with revenue increases in third-quarter results, but the future of commercial real estate remains a looming threat, banking executives said Friday.

JPMorgan Chase, Wells Fargo and Citigroup reported a combined revenue of $81B on Friday, resulting in more than $22B in profits, The Wall Street Journal reported. The haul represents a 14% increase in revenue and more than a one-third boost in profits over Q3 of last year.

As interest rates stay high, banks are earning more from loans. Wells Fargo and JPMorgan both said they expect net interest income to grow by more than previously expected this year, per the WSJ.

But with commercial real estate borrowers facing potential defaults, banks cited those loans as potential risks during their earnings calls, pointing to the office sector as a specific concern.

Wells Fargo said it increased its credit loss allowance by $333M in the third quarter, primarily to cover commercial real estate office loans, Chief Financial Officer Mike Santomassimo said, adding that the office market remains depressed amid high vacancy rates.

"The office portfolio, in particular, in the commercial real estate sector is the place where we're seeing weakness," Santomassimo said during the call, per Reuters. “We do expect to see some losses there over time, but we haven’t seen anything significant yet.” 

Wells Fargo’s profits were up 61% from a year ago.

Deutsche Bank AG is also bracing for tougher times ahead for commercial real estate, Bloomberg reported. CEO Christian Sewing told Bloomberg TV the combination of work-from-home and elevated borrowing costs will weigh on the office sector.

“It’s an asset class that deserves monitoring,” Sewing said. 

JPMorgan Chase Chief Financial Officer Jeremy Barnum reported a “trickle of charge-offs coming through the office space,” but he said it was expected. 

“The numbers are very small and more or less just the realization of the [credit loss] allowance that we've already built there,” Barnum said during Friday's earnings call.

In all, the three banks wrote off about $4B in bad loans, twice the charge-offs they recorded a year ago, per Bloomberg.

The European Central Bank, which oversees Deutsche Bank, has increased its scrutiny of commercial real estate loans and has asked property valuers to assess whether its estimates are too optimistic, Bloomberg reported. Sewing said it’s not “completely unthinkable” that interest rates could rise again.

“The interest rates we see right now will be there for longer,” Sewing told Bloomberg. “That is something our clients need to position for. That will also have an impact on the economic development next year and in 2025.”

Bank executives took time to complain about new rules tied to Basel III that would impose stricter capital requirements on U.S. banks and could funnel more lending to nonbank sources. They also warned that the extra cash amassed by Americans earlier in the pandemic is being quickly depleted. A new conflict in the Middle East and continued fighting in Ukraine also add to uncertainty, they said.

“It’s just extraordinary issues we have to deal with,” JPMorgan Chase CEO Jamie Dimon said on his company's call. “How do you prepare the company for that?”