Goldman Sachs has been hit by an increase in commercial real estate loans that are past due in the first quarter. This was partly caused by Elon Musk refusing to pay Twitter’s rental.
Goldman’s licensed bank entity filed reports with the US Federal Deposit Insurance Commission showing that the value of commercial real estate loans (CRE) in arrears on repayments increased 612 percent to $840mn during the first quarter.
According to Bankingregdata.com which compiles the FDIC reports, this was a much larger increase than the delinquent loans for CRE reported by the US banking industry. These were up 30% over the same time period, to just under $12bn.
Goldman Sachs’ deposit-taking division has seen a dramatic increase in delinquencies, at a moment when rival banks have warned of growing losses in commercial property loans. Most are tied to offices and were made prior to the pandemic that ushered in work-from home culture.
Goldman Sachs has a much lower exposure to commercial property lending than some of its larger competitors. According to FDIC data, at the end of first quarter it had outstanding loans of $8.4bn backed by commercial real estate. Wells Fargo has $91bn, and Bank of America has $60bn.
The bank’s frustrations are reflected in the escalating delinquencies as it attempts to diversify away from its traditional focus of deals and trading.
Goldman was part of a group that included Citigroup and Deutsche Bank, which lent $1.7bn (£1.25bn) to Columbia Property, an investment trust in real estate, for seven office buildings, including two large Twitter offices, located in San Francisco and New York.
According to lawsuits , Twitter stopped paying rent in November. Elon Musk, billionaire owner and founder of the social network, told his employees that he did not plan to resume payments or pay past dues. Columbia Property, the company that is suing Twitter for the missed payments defaulted on its loan in February. Columbia Property declined comment. Twitter, a company that has a policy not to reply to the media, was not available for comment.
Goldman has a relatively small exposure in the sector. Therefore, bad loans won’t have an impact on the company’s earnings. Christopher Kotowski is a banking analyst with Oppenheimer. He says that lending doesn’t really matter for Goldman. According to Goldman, commercial real estate loans account for less than 20% of the bank’s total loan book.
Bankingregdata.com reports that more than 10% of the CRE loans in its banking subsidiary are delinquent, whereas this is less than 1% of their peers.
Goldman’s CRE lending is defined more broadly in SEC filings, and also by discussions with investors. This includes loans to firms that purchase and sell real estate loans as well as loans to pools of CRE loans.
Delinquencies on this yardstick are lower but still higher than their peers. Goldman said that if you take a look at all of Goldman’s commercial real estate loans, the delinquency rates are below 2 percent.
FDIC places these loans in a separate category, despite the fact that they tend to have a much lower default rate.
Goldman Sachs, which was regulated as a bank after the financial crisis, spent the last decade increasing its lending resources. Goldman has now lent out nearly $180bn in bank loans, compared to $3bn 10 years ago.
Goldman stated that corporate lending would be one of its priorities in 2020. Stephen Scherr said, “We’re embracing the banking model” during a presentation made to investors. “We believe that this will be a significant source of future upsides for the company.”
Profits at the bank’s lending division rose to $3.7bn, a record high. This is a 20% increase from the same quarter last year.
Goldman is willing to lend more to corporate borrowers with higher risk than its competitors. Over 65 percent of Goldman’s commercial loans go to “junk”, or borrowers with a low credit rating. This compares to 28 per cent at JPMorgan Chase, and 17 per cent at Citi.
Goldman’s delinquent loan volume, according to FDIC figures, increased from $2.4bn to $3.2bn by the end of first quarter. This is about 2 percent of Goldman’s loans outstanding.
Bankregdata.com reports that the majority of these are related to consumer credit, such as credit cards, and make up 65 percent of its loan losses provisions.
Goldman announced its intention to stop lending to consumers earlier this year by selling $1bn in loans linked to its Marcus consumer banking unit.
David Fanger, who is the bond rating company Moody’s Investors Service’s successor to Goldman Sachs, stated: “Even if their risk appetite might be greater than other firms, there are more proactive risk management practices.”