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Big Banks Are Drowning in Delinquent Real Estate Debt

EDITOR'S NOTES

The titans of U.S. banking are getting a harsh lesson in real estate economics. According to the Financial Times, the likes of JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs, and Morgan Stanley are watching their bad commercial real estate loans balloon beyond their loss reserves. It’s a classic case of too little, too late, with reserves plummeting from $1.60 to a mere 90 cents against every dollar of debt that’s been gathering dust for 30 days or more. The amount of this neglected, delinquent property debt has nearly tripled in 2023, hitting an alarming $9.3 billion. How might this sink the US banking system and, by extension, the US economy?

US retail bank Capital One has announced plans to acquire US credit card issuer Discover Financial Services in a $35.3bn all-stock deal. The acquisition would create the sixth-largest US bank by assets and a credit card business that can compete with rivals JPMorgan and Citi. Discover also has a payments business that, while smaller than rivals Visa and Mastercard, covers around 200 countries and territories within its network.

The timing of a potential deal coincides with planned reforms to US bank merger regulations, with regulators aiming to bolster transparency and intensify scrutiny. The planned merger between Capital One and Discover is expected to face heightened antitrust scrutiny, given the substantial size of their respective credit card businesses. 

Acquiring Discover will give Capital One access to a credit card network of 305mn cardholders, adding to its existing base of more than 100mn customers. Should regulatory approval be granted, the deal is expected to take place in late 2024 or early 2025.

Bad commercial real estate loans at the largest US banks are exceeding loss reserves due to a spike in late payments linked to offices, shopping centres, and other properties. As reported by the Financial Times, average loss reserves at JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs and Morgan Stanley have decreased from $1.60 to 90 cents for every dollar of commercial real estate debt with 30 days or more in delinquency. Delinquent commercial property debt for major US banks nearly tripled in 2023, reaching $9.3bn.

Michael Barr, the Federal Reserve’s vice-chair for supervision, said on Friday that regulators are “closely focused” on risks arising from commercial real estate loans. Across the wider US banking sector, delinquent commercial property loans surged to $24.3bn last year, more than double the previous year’s $11.2bn, according to the FT.

Barclays has announced a significant operational overhaul as part of a £2bn cost-cutting drive across the business that will take place over the next two years. The plan includes asset sales and a reorganisation of its business divisions, alongside a pledge to return £10bn to shareholders through dividends and share buy backs.

CEO CS Venkatakrishnan is under pressure to restore investor confidence and boost the London-based lender’s falling profits. The bank reported a 6 per cent year-on-year decline in pre-tax profits to £6.6bn in 2023. 

Barclays also confirmed that it is targeting a return on tangible equity greater than 12 per cent for 2026, ahead of its strategy update due to be announced later today. “Our new three-year plan, which we will be announcing at the investor update today, is designed to further improve Barclays’ operational and financial performance, driving higher returns, and predictable, attractive shareholder distributions,” said Venkatakrishnan. 

Australia’s ANZ has received a significant legal win on appeal after its proposed $3.2bn acquisition of rival Suncorp’s banking arm was given the go-ahead. The Australian Competition Tribunal authorised the take-over this morning, stating it was satisfied that the proposed acquisition provided a “net public benefit”. The takeover was initially rejected by the Australian Competition and Consumer Watchdog in August last year, after it raised concerns about the market dominance of the county’s big four banks.

Former Bank of China chair Liu Liange has been arrested on charges of accepting bribes and illegally granting loans. The arrest is part of President Xi Jinping’s two-year anti-corruption campaign targeting the country’s financial sector, which has seen authorities investigate a wave of prominent bankers and financiers. 

The charges against Liu include providing assistance to others in obtaining loans and personnel appointments in exchange for cash and property. He is also accused of violating regulations by approving loans that resulted in substantial losses, as reported by the state-run Xinhua News Agency.

This article originally appeared on The Banker

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