Bank of America seems to be taking a cue from its largest shareholder — when others are exiting a specific industry, that means it’s a good time to get in.
Commercial real estate lending has fallen out of favor with some lenders, but Bank of America increased its exposure to the segment in the third quarter. It’s a strategy that resembles the longtime value-investing approach of Warren Buffett, whose Berkshire Hathaway owns about 6.8% of BofA stock and has made a career of investing in industries such as financial services and newspapers after others had fled.
BofA’s CRE loans rose 2% from a year earlier to $60.8 billion. And the Charlotte, N.C., company plans to continue making more CRE loans when financially feasible, Chief Financial Officer Paul Donofrio said during a conference call Monday.
“We're starting to see other banks pull back in CRE, and we're seeing more opportunities now with clients within our client selection and risk framework,” Donofrio said.
CRE lending has been falling at banks in recent quarters partly because of their own choosing and partly for reasons beyond their control. For one, nonbank lenders have offered rates and terms that banks were unwilling to match. But CRE borrowers have also taken out fewer bank loans as they have been flush with cash from the federal tax cut that took effect this year.
At Wells Fargo, commercial real estate loans dropped 6.3% to $120.4 billion in the third quarter. At PNC Financial Services Group, they dropped 3.2% to $28.6 billion.
BofA had also been slowing or, in some cases, reducing CRE lending. For example, its loans for multifamily properties, one component of commercial real estate lending, fell 9% to $5.3 billion in the second quarter from a year earlier, according to BankRegData.
But the widespread pullback from CRE loans by so many other banks has created an opportunity for BofA, Donofrio said.
“CRE is going to turn out to be a great example of responsible growth and how maintaining a strong balance sheet and disciplined underwriting standards through the cycle means you're going to be able to deliver for your customers and clients when others can't,” he said.
To be certain, observers do not expect BofA to pull out all the stops in pursuit of CRE loans.
Its third-quarter figure was "a relatively prudent growth rate, and I would not expect that to go into the double digits,” said David Fanger, an analyst at Moody’s Investors Service. “The CRE market has been getting frothy, and that’s why BofA themselves have been conservative. This is simply a recognition that other players have started to pull back.”
Investors should not worry that BofA is going to take on too much risk, because current management learned some hard lessons during the financial crisis, said Gerard Cassidy, an analyst at RBC Capital Markets.
“Bank of America will look for CRE lending opportunities as long as they meet their underwriting risk criteria,” Cassidy said. “In view of what this company and management went through immediately after the financial crisis, to think they would lower their underwriting standards for CRE loan growth is crazy.”
It also helps that BofA’s exposure to commercial mortgages is one of the lowest among the biggest banks. About 6.1% of its total loans were in CRE properties in the U.S., as of Sept. 30. That compared to 12.8% for both Wells and PNC.
JPMorgan Chase’s commercial division reported just over $18 billion of CRE loans at Sept. 30 — up 3% from the second quarter and 5% from a year earlier. That was slower than in the past — by one count, the bank's CRE loans were growing at an 18% annual pace in mid-2016.
During a conference call with analysts Friday, JPMorgan's chief financial officer, Marianne Lake, described the pace of growth as “a little less than the industry.”
“We are seeing increased competition and continue to be very selective,” Lake said.
BofA’s financial position is such that it is able to selectively seize market share in CRE lending when it is available, Fanger said. It has the capital levels and a healthy net interest margin that allow it to do so, he said.
Or, as BofA CEO Brian Moynihan put it, when others get out of the CRE business, BofA is going to get in.
“The ebbs and flows of the competition will come or go, and we’ll be here driving,” Moynihan said during the call Monday.
