Goldman Sachs was hit by an increase in delinquencies on commercial real estate loans in the first quarter, fueled in part by Elon Musk’s refusal to pay Twitter rent.
The value of loans to commercial real estate borrowers (CREs) in arrears soared 612% in the first quarter to $840 million, according to reports filed by Goldman’s licensed banking entity with the Federal Deposit Insurance Commission. UNITED STATES.
That was much higher than the increase in delinquent CRE loans reported by the entire U.S. banking industry, which rose 30% over the same period to just over $12 billion, according to Bankingregdata. .com, which collects FDIC reports.
The rise in delinquencies in Goldman’s deposit business comes at a time when rival banks are warning of mounting losses on commercial real estate loans, most of which are tied to office buildings and were made before the pandemic won’t usher in a work-from-home culture.
Goldman has far less exposure to commercial real estate loans than its big rivals. At the end of the first quarter, it had $8.4 billion in loans outstanding secured by commercial property, according to the FDIC report. Wells Fargo had $91 billion and Bank of America had $60 billion.
However, the spike in delinquencies is another sign of the frustrations the bank has faced as it tries to diversify its business away from its traditional focus on transactions and commerce.
Goldman was part of a group of banks, including Citigroup and Deutsche Bank, which lent $1.7 billion to Columbia Property, a real estate investment trust, against seven office buildings in San Francisco and New York, including two housing large offices for Twitter.
Twitter stopped paying rent in November and Elon Musk, the social media network’s billionaire owner, told employees he had no plans to start payments again or cover overdue payments, according to reports. legal proceedings. Columbia Property, which is suing Twitter over the missed payments, defaulted on the loan in February. Columbia Property declined to comment. Twitter, which has a policy of not responding to press, could not be reached for comment.
Given Goldman’s relatively low exposure to the sector, bad debt will not have a material impact on its earnings. “Loans don’t matter that much to Goldman,” said Oppenheimer banking analyst Christopher Kotowski. Commercial real estate loans represent less than 20% of the bank’s overall loan portfolio, according to Goldman’s own calculations.
Yet more than 10% of its CRE loans held at its banking subsidiary, which accounts for 90% of all its loans, are in some form of delinquency, according to Bankingregdata.com, while the average delinquency at its peers is lower. more than 1 percent.
In SEC filings and discussions with investors, Goldman defines its CRE loans more broadly and includes loans made to investment firms that buy and sell real estate debt as well as loans used to aggregate CRE loans into investment securities.
In this regard, delinquencies are lower, but still higher than those of peers. “If you look at all of our commercial real estate lending business, our delinquency rate is less than 2%,” Goldman said.
The FDIC, however, puts these loans, which tend to have much lower default rates, in a different category.
Goldman, which became a regulated bank in the wake of the financial crisis, has spent the past decade putting more resources into lending. The company now has nearly $180 billion in outstanding bank loans, up from $3 billion a decade ago.
In 2020, Goldman said corporate lending was one of the company’s top priorities. “We’re embracing the banking model,” Stephen Scherr, then chief financial officer, said during an investor presentation. “We believe this will be an important source of future growth for the business.”
The bank benefited from higher interest rates, with its lending entity’s profits hitting $3.7 billion in the first quarter – an all-time high and a 20% jump from the same period last year .
Nevertheless, the larger loan portfolio is also a source of potential losses given Goldman’s willingness to lend to riskier corporate borrowers compared to its rivals. Just over 65% of its commercial loans are made to “undesirable” borrowers without investment grade credit ratings, compared to 28% and 17% for JPMorgan Chase and Citi, respectively.
Goldman’s total delinquent loan volume, according to FDIC data, jumped to $3.2 billion at the end of the first quarter, or about 2% of its outstanding loans, from $2.4 billion. one year ago.
Most of them are related to credit cards and other consumer loans, which make up about 65% of its loan loss provisions, according to Bankregdata.com.
Goldman earlier this year signaled its intention to exit consumer lending by selling $1 billion in loans tied to its Marcus consumer bank.
David Fanger, who tracks Goldman for bond rating firm Moody’s Investors Service, said: “While their risk appetite may be greater than that of other companies, they are generally more proactive in managing risk.”