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WaFd (WAFD) Trims CRE Exposure, Agrees to Sell CRE Loans to BofA

In an effort to trim its commercial real estate (CRE) exposure, WaFd, Inc WAFD entered an agreement to sell 2,000 commercial multi-family real estate loans to Bank of America BAC for $2.9 billion. The loans have an unpaid principal balance of $3.2 billion.

Upon the completion of the deal, expected on Jun 21, BofA plans to enter a structured transaction or loan sale with one or more funds managed or advised by Pacific Investment Management Company LLC.

WaFd and BofA will undergo due diligence through Jun 18 and if either party fails to finalize the deal, the other is entitled to 1.5% of the aggregate purchase price for each loan.

Last year, amid concerns related to banks’ CRE exposure, regulators such as the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency were looking more closely at banks whose CRE portfolios accounted for more than triple their capital and at portfolios that grew at least 50% in the past three years.

Thus, in order to reduce their CRE exposure, several banks are looking for options.

A few days ago, New York Community Bancorp, Inc. NYCB entered a commitment letter with JPMorgan Chase & Co. to sell around $5 billion in mortgage warehouse loans to the latter, a move which is in line with NYCB’s focus to improve capital, liquidity and loan-to-deposit metrics.

The agreement underlines NYCB’s efforts to shrink its balance sheet by reducing non-core assets. Also, NYCB has been aiming to diversify its loan portfolio. The bank’s strategic target is to reduce its CRE portfolio from $47 billion to around $30 billion while building a robust middle-market relationship banking franchise.

Notably, WaFd’s asset quality has been weakening over the past few years. Provision for credit losses increased in fiscal 2021, 2022 and 2023 as the company continued to build reserves to combat the worsening macroeconomic backdrop. Further, in the first half of fiscal 2024, provisions increased mainly because of the LBC acquisition.

While WaFd has decided to reduce its CRE exposure, still huge exposure to commercial loans makes us apprehensive. Significant exposure in only one category of the loan portfolio is likely to hurt the company’s financials if the economic situation deteriorates.

Over the past six months, WAFD shares have gained 6.9% compared with the industry’s rally of 15.9%.

 

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Zacks Investment Research


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Currently, WAFD carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

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