By Nupur Anand and Saeed Azhar

NEW YORK (Reuters) -Wells Fargo & Co’s Chief Executive Officer Charlie Scharf said on Wednesday that there will be losses in the office loan space but the lender was proactively managing its portfolio.

“We will see losses, no question about it. But in the context of the overall portfolio and the overall size of our loan portfolio with the company, we are not overly concentrated in office (loan space),” Scharf said while speaking to investors at a conference.

The bank’s outstanding commercial real estate (CRE) loans stood at $154.7 billion, or 16% of total loans, with $35.7 billion in office loans at the end of March.

Office loans have posed concerns for some lenders as property values decline and more borrowers default on their loans.

Scharf also said that consumer spending and credit quality remain strong but the bank has tightened credit in its card business in areas where the lender was beginning to see early signs of weakness.

“There is a differentiation between the more affluent consumer and the less affluent,” Scharf said adding that customers with FICO credit scores below 660 were performing substantially worse than customers with higher scores.

The San Francisco-based bank set aside $1.21 billion in the first quarter to cover potential loan losses, compared to $787 million a year earlier.

Banks have been building rainy day funds to prepare for a recession that bankers and economists predict will occur in the second half of the year.

“Loan growth is not extremely strong. We’ve also been proactive about taking some measures to reduce originations for marginal borrowers, both on the commercial side and on the consumer side,” Scharf said.

The lender is also actively looking at its liquidity position after the banking turmoil in March caused by the failures of three regional lenders. The collapses rattled investors and stoked concern about a broader crisis.

The fourth-largest U.S. bank has been prohibited by regulators from growing its assets after a series of scandals over how it treats customers. Regulators have also ordered it to improve governance and oversight.

The asset cap has challenged the lender’s ability to compete with larger rivals such as JPMorgan Chase & Co, Bank of America Corp and Citigroup Inc.

Wells Fargo agreed this month to pay $1 billion to settle a lawsuit accusing it of defrauding shareholders about its progress in recovering from the scandals, while denying wrongdoing.

Scharf said that repairing the firm, which has a history stretching back more than 170 years, has taken longer than he expected but the process is on track. The CEO took over in 2019.

(Reporting by Nupur Anand and Saeed Azhar in New York; editing by Jason Neely and Nick Zieminski)

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