NYCB reignites banking industry, commercial real estate fears

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, United States, February 7, 2024.

Brendan McDermid | Reuters

Lender in difficulty Community Bank of New York disclosed a litany of financial measures over the past 24 hours in a bid to calm nervous investors.

But one of the most crucial resources for any bank seems to be lacking for NYCB recently: trust.

The regional bank Tuesday evening said that deposits were stable at $83 billion and that the company had sufficient resources to cover any possible leakage of uninsured deposits. A few hours later, he promoted president Alessandro DiNello to a more active role in management.

The moves led to a 6% jump in NYCB shares on Wednesday, a slight drag on the stock's more than 50% decline since the bank reported its fourth-quarter results last week. On Thursday, shares of the Hicksville, N.Y.-based lender resumed their decline, falling more than 6%.

“There is a crisis of confidence here,” said Ben Emons, head of fixed income at NewEdge Wealth. “The market does not believe in this management.”

Amid this freefall, ratings agency Moody's lowered the bank's credit ratings by two notches, citing risk management issues while the company searches for two key executives. Worse still, NYCB was hit with its first shareholder lawsuit Wednesday over the stock collapse, alleging executives misled investors about the status of its real estate holdings.

The sudden decline of NYCB, previously seen as one of last year's winners following the acquisition of Signature Bank's assets, has renewed fears about the state of mid-sized US banks. Investors fear that losses on some of the $2.7 trillion in commercial real estate loans held by banks could trigger a new wave of unrest after withdrawals consumed Silicon Valley Bank and Signature last March.

Real estate

Last week, NYCB said it was being forced to stockpile far more cash to cover losses on office and apartment buildings than analysts had expected. Its provision for loan losses jumped to $552 million, more than 10 times the consensus estimate.

The bank also cut its dividend by 71% to preserve capital. Companies are generally reluctant to cut their dividends because investors favor companies that pay regular payouts.

NYCB's results sent shares of regional banks lower, as the group plays a relatively large role in the nation's commercial real estate market compared to megabanks, while generally setting aside less for potential defaults.

Shares of Valley National, another lender with a larger weighting in commercial real estate, for example, are down about 22% over the past week.

NYCB's results “returned investor sentiment toward the risk of accelerating CRE non-performing loans and loan losses over the course of 2024,” Morgan Stanley analyst Manan Gosalia wrote in a note Wednesday. of research.

Despite a suddenly low valuation, “the perceived risk associated with anything related to commercial real estate is also likely to weigh on investors' appetite to step in,” Bank of America analyst Ebrahim Poonawala wrote Wednesday. He rates NYCB as “neutral” and has a price target of $5.

Office buildings are at greater risk of default due to declining occupancy rates linked to increased remote and hybrid work models, and changes to New York's rent stabilization laws have made some multi-family housing more profitable. dive value.

“People thought offices were where stress was; now we're dealing with rent-controlled properties in New York,” Emons said. “Who knows what will happen next.”

“Stressed” institutions

Emons noted that, just as during the tumult in March, speculators piled into trades betting that NYCB shares would continue to fall.

In particular, activity for puts that prove profitable if NYCB stock falls to $3 or less has increased, he said. A put is a financial contract that gives the buyer the right to sell a stock at a predetermined price and within a specific time frame.

On Tuesday, Treasury Secretary Janet Yellen said she was “concerned” about losses in commercial real estate, but said banking regulators were working to ensure the financial system would adjust.

“I think it's manageable, although some institutions may be very stressed by this problem,” Yellen said, declining to talk about any specific bank.

This is consistent with the view of Wells Fargo Analysts say regulators will likely take a more critical stance on reserves for possible loan losses after the NYCB surge.

“More rigorous credit analysis would likely result in more charge-offs, which could lead to more capital requirements,” write Wells Fargo analysts led by Mike Mayo.

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