On Wednesday, shares of large and mid-sized US banks experienced a notable underperformance compared to the broader market, according to a recent Thompson Reuters report. The S&P 500 Banks Index (.SPXBK) closed down 2.0 percent, while the benchmark S&P 500 Index (.SPX) fell 0.6 percent. Investors’ concerns centered around commercial real estate loans, as comments from industry executives heightened apprehensions within the banking sector.
During a Sanford C. Bernstein investor conference, Wells Fargo & Co. (WFC.N) CEO Charlie Scharf acknowledged potential losses in the office loan sector. Scharf reassured investors that proactive measures were being taken to manage the bank’s portfolio and emphasized that it was not overly concentrated in this area. Similarly, Jonathan Gray, president of Blackstone (BX.N), highlighted the “unprecedented weakness” observed in older office buildings, which represented less than 2 percent of the company’s equity portfolio in real estate.
Gray pointed out the challenges faced by office buildings, such as high vacancy rates, declining rents, and companies reevaluating their space requirements in light of remote work and economic conditions. Given these factors, lenders and buyers exhibited reluctance, resulting in declining valuations. However, Gray also emphasized that office buildings accounted for only approximately 3 percent of the US banking system, making the potential losses significantly smaller in comparison to the housing market crisis of 15 years ago.
The Wells Fargo comments and ongoing concerns over loans made to the office market had a broad impact on bank stocks. Rick Meckler, a partner at Cherry Lane Investments, expressed the notion that despite diversification efforts by Wells Fargo, other banks might still suffer from the implications. Consequently, Wells Fargo (WFC.N) ended the session down 2.9 percent, while Morgan Stanley (MS.N), Bank of America (BAC.N), Goldman Sachs (GS.N), JPMorgan Chase & Co (JPM.N), and Citigroup (C.N) experienced declines ranging from 0.9 percent to 2 percent.
Regional lenders faced even greater pressure, with KeyCorp (KEY.N) leading the decline in the S&P bank index, falling 5.9 percent. Zions (ZION.O) experienced a 5.6 percent drop, and Citizens Financial (CFG.N) saw a 5 percent decline.
In addition to concerns over commercial real estate loans, the broader market also faced jitters due to the upcoming lawmakers’ vote on raising the US debt ceiling. Moreover, unexpectedly strong labor market data reinforced expectations for further Federal Reserve interest rate hikes.
Furthermore, on the same day, the Federal Deposit Insurance Corporation released data revealing a record decline of 2.5 percent in US banks’ total deposits during the first quarter.
Overall, the concerns surrounding commercial real estate loans, coupled with broader market uncertainties, had a tangible impact on US bank stocks. Market participants closely monitored the evolving situation, mindful of potential implications for the banking sector and its ability to navigate these challenges effectively.