Commercial Home Loan Defaults at Goldman Sachs Due to Elon Musk’s Refusal to Pay Twitter Rent
Goldman Sachs saw a surge of commercial home loan defaults in Q1, reported to be caused in part by Elon Musk’s refusal to pay Twitter rent. There was a rise of 612% among commercial real estate borrowers overdue on repayments to $840m in Q1, far higher than the 30% rise reported by the entire US banking sector to just over $12bn, according to reports filed by Goldman’s licensed banking entity with the US Federal Deposit Insurance Commission. While Goldman has less exposure to commercial home loans than its bigger competitors, the rising delinquencies are indicative of its struggle to diversify its business away from traditional operations and trading.
Goldman’s Relative Exposure to Commercial Home Loans
At the end of Q1, Bank of America had $60bn in outstanding loans secured by commercial real estate, Wells Fargo had $91bn, while Goldman Sachs had $8.4bn, according to the FDIC report. However, more than 10% of the company’s CRE loans held in bank branches – which represent 90% of its total loans – are in some form of dues, while the average delinquency among its peers is less than 1%, according to Bankingregdata.com. The bank defines its CRE loans more broadly in SEC filings and discussions with investors and includes loans made to firms that buy and sell real estate debt, as well as loans used to pool CRE loans into investment securities. On that metric, delinquencies are lower but still higher than peers. Goldman’s delinquency rate among its entire commercial real estate lending business is less than 2%, it said.
Goldman’s Focus on Corporate Lending
Goldman Sachs, which has spent the last decade putting more resources into lending, now has nearly $180bn in bank loans outstanding, up from $3bn a decade ago. In 2020, corporate lending was a top priority for the company, and it benefited from higher interest rates, with its lending entity’s profits climbing to $3.7bn in Q1 and a 20% increase over the same period last year. However, the larger loan book is also a source of potential losses given Goldman’s willingness to lend to riskier corporate borrowers than its rivals. Just over 65% of its commercial loans are to “junk” borrowers without an investment grade credit rating, compared to 28% and 17% for JPMorgan Chase and Citigroup, respectively.
Goldman’s Total Delinquent Loan Volume
Goldman’s total delinquent loan volume, according to FDIC data, reached $3.2bn at the end of Q1, or about 2% of its outstanding loans, compared to $2.4bn a year ago. Most of these are connected to credit card and other customer loans, which constitute 65% of its loan loss reserves, according to Bankregdata.com. Earlier this year, Goldman said it intended to exit customer lending by selling $1bn in loans linked to its consumer bank Marcus.
A Well-Informed Engaging Piece
The COVID-19 pandemic has drastically changed the landscape of commercial real estate, most of which are related to office buildings, as a work-from-home culture is on the rise. This led to a wave of commercial home loan defaults in Q1, hitting banks differently. Walls Fargo had $91bn and Bank of America had $60bn that fell within the same category. However, Goldman Sachs suffered the most significant blow of all, where commercial real estate overdue repayments jumped 612% in the first quarter of 2021 to $840 million. Goldman Sachs’ commercial real estate delinquency levels were much higher than the rise in commercial real estate loan defaults reported by the entire US banking sector, which rose 30%, amounting to $12 billion.
Goldman Sachs: Less Exposure, but Still Struggling
Goldman’s relative exposure to commercial home loans is much less than its bigger competitors. At the end of Q1, Bank of America had $60bn in outstanding loans secured by commercial real estate, Wells Fargo had $91bn, while Goldman Sachs had $8.4bn. However, despite its relatively small exposure to the industry, the rising delinquencies signify the bank’s struggle to diversify its business away from traditional operations and trading. While Goldman has spent the last decade putting more resources into lending, it has a much higher risk appetite than its competitors. This is evident in the fact that over 65% of its commercial loans are to “junk” borrowers without an investment-grade credit rating, while the numbers of JP Morgan Chase and Citigroup are only 28% and 17%, respectively.
Potential Losses and Delinquent Loan Volume
Goldman’s willingness to lend to riskier corporate borrowers than its rivals underlies the looming potential losses. With a larger loan book that is completely source of potential losses given its corporate lending style, they are more prone to delinquencies. The delinquent loan volume increased to $3.2bn in Q1 2021, compared to $2.4bn a year ago, with most of them connected to credit card and other customer loans. This represents 2% of the company’s outstanding loans. While most of Goldman’s loans are connected to customers, commercial real estate delinquencies still significantly impacted the company. More than 10% of the company’s commercial loans held in bank branches, which represent 90% of its total loans, are in some form of delinquency.
Conclusion
Goldman Sachs was hit hard in the first quarter of 2021, registering the most significant blow of all major banks as commercial real estate overdue repayments jumped 612%. The spike was caused by a refusal by Elon Musk to pay Twitter rent, which had a domino effect on the industry. While the bank has less exposure to commercial home loans than its larger competitors, the surge in delinquencies is a sign of its struggle to diversify its business away from its traditional focus on trading operations. With a growing loan book of $180bn in bank loans outstanding, the bank’s high-risk appetite in lending to riskier corporate borrowers than its rivals is a potential source of losses going forward. Delinquent loan volumes amounted to $3.2bn in Q1 2021, having increased from $2.4bn a year ago, with customer loans accounting for most of it. Despite all these, if Goldman Sachs plays its card right, it might still remain profitable and overcome the incessant challenges.
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Goldman Sachs was hit by a wave of commercial home loan defaults 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 (CRE) overdue on repayments jumped 612% in the first quarter to $840 million, according to reports filed by Goldman’s licensed banking entity with the U.S. Federal Deposit Insurance Commission.
That was much higher than the rise in CRE loan defaults reported by the entire U.S. banking sector, which rose 30% over the same period to just over $12 billion, according to Bankingregdata.com, which compiles the FDIC reports.
The jump in delinquencies in Goldman’s deposit-taking business comes as rival banks warn of mounting losses on commercial real estate loansmost of which are related to office buildings and were built before the pandemic introduced a work-from-home culture.
Goldman has much less exposure to commercial home loans than its larger competitors. At the end of the first quarter, it had $8.4 billion of outstanding loans secured by commercial real estate, according to the FDIC report. Wells Fargo had $91 billion and Bank of America had $60 billion.
However, the rising delinquencies are another sign of the frustrations the bank has faced as it tries to diversify its business away from its traditional focus on operations and trading.
Goldman was part of a group of banks including Citigroup and Deutsche Bank that lent $1.7 billion to Columbia Property, a real estate investment trust, against seven office buildings in San Francisco and New York, including two that house large offices for Twitter.
Twitter stopped paying rent in November and Elon Musk, the billionaire owner of the social network, has told employees he doesn’t plan to restart payments or cover past dues. according to the causes. Columbia Property, which is suing Twitter over missed payments, defaulted on its loan in February. Columbia Property declined to comment. Twitter, which has adopted a policy of not responding to press, could not be reached for comment.
Given Goldman’s relatively small exposure to the industry, bad loans won’t have a significant impact on its earnings. “Lending doesn’t really matter to Goldman,” says Christopher Kotowski, a banking analyst at Oppenheimer. Commercial home loans account for less than 20 percent of the bank’s total loan portfolio, according to Goldman calculations.
However, according to Bankingregdata.com, more than 10% of its CRE loans held in its bank branch, which represents 90% of its total loans, are in some form of delinquency, while the average delinquency among its peers is less 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 pool CRE loans into investment securities.
On that metric, delinquencies are lower, but still higher than their peers. “When you look at our entire commercial real estate lending business, our delinquency rate is less than 2 percent,” Goldman said.
The FDIC, however, places 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 last decade putting more resources into lending. The firm now has nearly $180 billion in bank loans outstanding, up from $3 billion a decade ago.
In 2020, Goldman said corporate lending was a top priority for the company. “We’re embracing the banking model,” then-chief financial officer Stephen Scherr said during a presentation to investors. “We believe this will be an important source of future upside for the company.”
The bank benefited from higher interest rates, with its lending entity’s profits climbing to $3.7 billion in the first quarter, an all-time high and a 20% jump over the same period last year. .
However, the larger loan book is also a source of potential losses given Goldman’s willingness to lend to riskier corporate borrowers than its rivals. Just over 65% of its commercial loans are to “junk” borrowers without an investment grade credit rating, 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, compared to $2.4 billion a year ago. year ago.
Most of these are tied to credit card and other consumer loans, which make up about 65% of its loan loss reserves, according to Bankregdata.com.
Goldman earlier this year signaled its intention to exit consumer lending by selling $1 billion in loans tied to its consumer bank Marcus.
David Fanger, who follows Goldman for bond rating firm Moody’s Investors Service, said: “While their risk appetite may be higher than other firms, they are generally more proactive at managing risk.”
https://www.ft.com/content/6bf11c8e-c3f3-40cb-9489-157db427602a
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