Banking Losses to Continue for Wells Fargo, Bank of America and JP Morgan Chase (WFC, BAC, JPM)

Some of the nation’s largest banks including Wells Fargo (NYSE: WFC), Bank of America (NYSE: BAC) and JP Morgan Chase (NYSE: JPM) will continue to face major losses from commercial real estate despite having repaid their emergency bailout funds to the federal government.

There were a total of 140 bank failures in 2009 and an additional 20 bank failures that have occurred in 2010. Although most of the bank failures have been small relatively unknown banks, the acceleration of small bank failures points to trouble ahead for some of the nation’s largest banks.

One of the major causes of small bank failures have resulted from losses on commercial real estate loans. Smaller banks haven’t been able to make use of capital markets to improve their balance sheets as Wells Fargo, Bank of America, JP Morgan Chase and Citibank have.

According to a report from a Congressional oversight panel, losses on commercial real estate has not come anywhere close to a peak yet. “The most serious wave of commercial real estate difficulties is just now beginning,” said the report.

Moody’s (NYSE: MCO), a credit rating agency, reported that loan delinquency on commercial mortgage-backed securities rose to 5.42% in January, representing the largest increase since the beginning of the financial crisis.

Standards & Poor’s also recently reported that during the last two recessions, losses on commercial mortgage-backed securities peaked 15 and 25 months after the end of their respective recessions. With the last financial crisis ending in the summer of 2009, that data would predict that losses would peak no sooner than at the end of 2010.

Although small banks have taken the brunt of the beating from commercial real estate losses, larger regional banks and national banks will begin to feel the effects of delinquencies in commercial real estate on their balance sheets as losses pile up over the next two years.

Almost every major bank, including for Wells Fargo, Bank of America and JP Morgan Chase are at risk to take heavy losses from commercial real estate. Each has a significant investment in the commercial real estate business and will like see losses increase through the end of 2011.