With the explosive performance of community banks in New York, investors are once again paying attention to the exposure of regional banks to the commercial real estate industry. At the same time, the cautious stance of the Federal Reserve on interest rate cuts may increase asset price risks.
Since last week's financial report was released, the stock price of New York Community Bank has plummeted by over 60%. Moody's has downgraded the bank's credit rating to junk, and panic has spread to Europe. The Stoxx 600 banking sector fell nearly 1% on the 7th. After releasing deposit data and considering selling assets, New York Community Bank regained lost ground on Wednesday (7th) afternoon and closed up 6.7%, temporarily ending the continuous adjustment situation.
Explosive performance and bearish performance followed one after another
The previously released financial report showed that the bank suffered an unexpected loss of $260 million in the previous quarter, with a credit loss reserve of over $550 million caused by home mortgage and office building loans, and announced a significant dividend reduction of 71%.
At the same time, after acquiring Flagstar Bank and New York Signature Bank in December 2022 and March 2023, their total assets were $116 billion, belonging to the fourth category of banks, and they need to submit their first capital plan to the Federal Reserve in April of this year. The CEO of the bank, Thomas Cagemi, stated that it is strengthening its risk management processes and capital to support its balance sheet.
The company's stock price has been continuously declining since the financial report was released, reaching a new low since the 1990s. In order to ease external concerns, the New York Community Bank announced on Wednesday that as of February 5th, the total deposit amount was $83 billion, higher than the $81.4 billion at the end of 2023. The total liquidity of $37.3 billion also exceeded the uninsured deposit amount of $22.9 billion, with a coverage rate of 163%. The total cash on the balance sheet was $17 billion. Meanwhile, the bank will consider selling loans from its commercial real estate investment portfolio and divesting them from its balance sheet.
As of Wednesday, at least 7 securities firms have lowered the bank's rating and target price. Last week, Fitch Ratings downgraded the bank's credit rating, stating that increased regulatory requirements would weaken the ability of New York Community Bank to focus on building capital. Meanwhile, the bank's provision scale also exceeded expectations.
On Tuesday (6th), another rating agency, Moody's, announced that it will downgrade the rating of New York Community Bank from Baa3 to Ba2 (junk) and may further downgrade its rating. "New York Community Bank faces various financial, risk management, and governance challenges. Its core commercial real estate loans and significant unexpected losses in multi family homes may cause potential investor confidence to shake. In the current environment, the company's increased use of market financing may limit the bank's financial flexibility."
With the promotion of the work from home model after the epidemic, office real estate continues to face pressure from declining occupancy rates. For banks, asset risk depends on their geographical market and loan exposure.
According to a statistical report released by Moody's in December last year, compared with the fourth quarter before the COVID-19 epidemic, the rent in Manhattan in the third quarter of 2023 decreased by 7.6%. During the same period, office rent in Los Angeles decreased by 3.4%, while in San Francisco it decreased by 31.9%. Overall, compared to the fourth quarter of 2019, rental prices in the top 25 cities decreased by 3.8% in the third quarter of 2023.
Is a new industry storm approaching
It is worth mentioning that before the bankruptcy of Silicon Valley Bank last year, rating agencies also significantly downgraded its credit rating.
Therefore, after the downgrade of community banks in New York, concerns about commercial real estate risks have been reignited. Since last week, concerns about the contagion of the crisis have led to a cumulative drop of nearly 9% in S&P regional bank ETFs. The sell-off also affected Europe this week, with the Stoxx 600 Bank Index falling nearly 1% on Wednesday, dragging down all three major European stock indexes, with Deutsche Bank, which has a large exposure to commercial real estate, falling nearly 5%.
Craig Erlam, senior market analyst at Oanda, said in an interview with First Financial reporters that the new round of selling by regional banks does indeed remind people of a series of bank bankruptcy storms that began in March last year. "Regional banks are particularly sensitive to changes in US bond yields. On the one hand, they hold a large number of treasury bond bonds, and on the other hand, loan demand will also be impacted by changes in yields." He cautioned that after the Federal Reserve recently poured cold water on the expectation of interest rate cut in March, US bond yields rose again recently, and benchmark 10-year US bonds exceeded 4%.
It is worth noting that federal funds rate futures show that expectations for the Federal Reserve's interest rate cut space this year have risen five times again. This change may also be due to the impact of the banking industry's difficulties on investor mentality.
James Demmert, Chief Investment Officer of Main Street Research, cautioned in a client report, "Investors should be very careful with regional banks as they have more connections to the fragile commercial real estate loan market, and some regional banks have weaker balance sheets, which is worrying."
On Tuesday local time, US Treasury Secretary Yellen emphasized at a hearing of the House Financial Services Committee that regulatory agencies still "are very concerned" about the value of commercial real estate in banks. Yellen stated that he is indeed concerned about commercial real estate. However, she believes that risks can be controlled, although some institutions may face significant pressure due to this issue.
Prior to Yellen, Federal Reserve Chairman Powell mentioned in a television interview program last Sunday that some smaller banks and regional banks "focused their risk exposure on these challenging areas.". According to a written record released by the media, Powell predicts that regional banks will experience "expected losses", but overall, the banking system will remain healthy. "This feels like a problem that we will be solving for many years. It's a considerable problem, but it doesn't seem to have the elements of the crisis we've seen in the past, such as the global financial crisis."