By Sinéad Carew

Shares of U.S. banks, both major and mid-sized, sharply underperformed the broader market on Wednesday with the S&P 500 Banks Index down 2.0% while the benchmark S&P 500's fell 0.5% with worries about commercial real estate loans in focus among bank investors.

Investors worried about potential losses among banks from office real estate loans after comments from executives, including Wells Fargo & Co's Chief Executive Officer Charlie Scharf and Blackstone President Jonathan Gray at a Sanford C Bernstein investor conference.

Wells Fargo's Scharf said on Wednesday that there will be losses in the office loan space and that the bank was proactively managing its portfolio while he looked to reassure investors that the company is not "overly concentrated" in that space.

Meanwhile, Blackstone's Gray talked about "unprecedented weakness" in older office buildings while noting that this segment currently makes up less than 2% of company's equity portfolio in real estate.

"Vacancy is 20-plus percent, rents are declining, companies now are obviously thinking about their space needs in light of remote work and the economic climate that's ahead. Lenders are reluctant to have exposure to office buildings. Buyers are reluctant. Valuations are going down," Gray said, according to a transcript from the Bernstein conference.

Rick Meckler, partner, Cherry Lane Investments, a family investment office in New Vernon, New Jersey said "continued concern over loans made to the office market," was hurting bank stocks broadly on Wednesday, citing the Wells Fargo comments.

"The implication is that there are those that will suffer even if Wells Fargo is diversified enough," Meckler said.

Citigroup, JPMorgan Chase & Co, Morgan Stanley, Goldman Sachs down more than 1% while Bank of America was down more than 2% and Wells Fargo dropped more than 3%.

Regional lenders Citizens Financial, Western Alliance Bancorp, PacWest Bancorp, Comerica, KeyCorp, PNC Financial Services, Fifth Third Bancorp and Zions were falling more than bigger lenders.

KeyCorp, down 5.5%, was the biggest decliner in the S&P bank index, and Zions was next, down 4.9%.

Also on Wednesday, the Federal Deposit Insurance Corporation announced that U.S. banks saw total deposits decline by a record 2.5% in the first quarter of 2023.

Sending the broader market down also was an upcoming vote by lawmakers on a deal to raise the nation's debt ceiling. Also unexpectedly strong labor market data reinforced bets for more Federal Reserve interest rate hikes [.N]

(Reporting by Sinéad Carew in New York, Mehnaz Yasmin in Bengaluru; Editing by Nick Zieminski)