Banks are bracing for losses on office loans and pulling back on lending for 2 good reasons, warns Wells Fargo CEO

• A wave of losses on office loans looms for US banks, Wells Fargo's CEO warned.
• Charlie Scharf said that has prompted US banks to pull back on lending for two reasons.

US banks are gearing up for losses on office loans – and pulling back on lending for two good reasons, according to Wells Fargo's CEO.

"We look city by city, we look property by property to look at our exposures. And I would say there's no question that there'll be losses," Charlie Scharf told a Bernstein conference in New York on Wednesday, referring to his own bank's potential losses on commercial real estate loans.

"But in the context of the overall portfolio and the overall size of our loan portfolio in the company, we're not overly concentrated in office," he added.

Investors have become increasingly worried about the commercial property sector following the collapse of Silicon Valley Bank, warning it could be the next domino to fall in the US.

That's because the industry faces headwinds, including higher interest rates as the Federal Reserve continues to battle inflation, tighter credit conditions, and working from home that's dampened appetite for office spaces.

According to Scharf, lenders are concerned that more borrowers could default on their debt.

"One is just banks being just more conservative as they start to see the marginal borrower struggle a little bit more than they had six months ago. I think that's just good business to get smarter about that," he told the conference.

Banks also expect tighter regulation following the collapse of lenders including SVB and First Republic this year, Scharf said, and were adjusting their standards accordingly.

"More banks should expect to have higher capital requirements," he said. "There's certainly a buzz around the market that banks are trying to be proactive."