US banks warn on commercial property

Two of America’s biggest banks, Morgan Stanley and Wells Fargo, on Wednesday threw into sharp relief the mounting woes of the US commercial property market when they reported large losses and surging bad loans.

The disappointing second-quarter results for two of the largest lenders and investors in office, retail and industrial property across the US confirmed investors’ fears that commercial real estate would be the next front in the financial crisis after the collapse of the housing market.

The failing health of the $6,700bn commercial property market, which accounts for more than 10 per cent of US gross domestic product, could be a significant hurdle on the road to recovery.

Colm Kelleher, Morgan Stanley’s chief financial officer, said he did not see the light “at the end of the commercial real estate tunnel yet”, after the bank reported a $700m writedown on its $17bn commercial property portfolio in the second quarter. “Peak to trough, you have already had a pretty nasty correction in the market but it is still not looking very good at the moment,” he said after Morgan Stanley reported its third straight quarterly loss.

Wells Fargo saw non-performing loans in commercial real estate jump 69 per cent, from $4.5bn to $7.6bn in the second quarter as the economic downturn caused developers and office owners to fall behind in their mortgage payments.

Shares in the San Francisco-based bank were down more than 3 per cent at $24.55 in the early afternoon in New York as the increase in commercial non-performing loans undermined news of its best-ever quarterly profit. Morgan Stanley shares dipped before moving higher.

Ben Bernanke, chairman of the Federal Reserve, was repeatedly questioned by lawmakers on commercial real estate while testifying to Congress on Wednesday.

Mr Bernanke warned that a continued deterioration in commercial property, where prices have fallen by about 35 per cent since the market’s peak and defaults have been rising sharply, would present a “difficult” challenge for the economy.

He added that one of the main problems was that the market for securities backed by commercial mortgages had “completely shut down”.

The widespread weakness in commercial real estate is a crucial issue for US banks, especially regional lenders that ramped up their exposure to local developers in the easy credit boom that preceded the crisis.

“The commercial real estate market is soft, and most of the big banks are seeing the same kind of thing,” said Howard Atkins, chief financial officer of Wells Fargo

http://www.ft.com/cms/s/0/3a1e9d86-76eb-11de-b23c-00144feabdc0.html

 

UCBH, a bank head quartered in San Francisco
but with branches in major US cities and China announced a few days ago that they are suspending payments on preferred stock. This is a bank that i have followed closely and have liked their business mix and their China connection, BUT they are very heavy into commercial real estate, particularly in California, and are being slammed to the mat by it. Good possibility they will drop of the Fed's "well capitalized" list. This stock will likely be at 50 cents before the summer is out. I had to sell a substantial position at a substantial loss. I still follow this bank closely, but it has gone from high reward to risk ratio to unacceptable risk. It is purely speculative now. The one thing that could save them is the connection to Minseng bank in China which has a 9% ownership and may expand that to 20%. If Minseng expands to 20% and they can raise enough capital, which will be exceedingly difficult unless they get more Government handouts, i might be interested again later. As for now it is highly speculative. They report next in August (the 22nd i believe).