Charles Schwab’s chief investment strategist predicts the future of local banks amid New York Community Bancorp’s lawsuit over Claman Countdown.
New York Community Bancorp’s commercial real estate exposure has increased investor scrutiny of local banks, with investors expected to face further pain for banks with office and multifamily real estate loans. There is also.
A year after the failure of Silicon Valley Bank in the spring of 2023 sparked a local banking crisis, concerns about the health of small banks are once again on the rise.
The recent earnings release, which caused NYCB stock to plummet by about 60%, has investors particularly focused on scrutinizing regional bank portfolios. That’s because small banks account for nearly 70% of all outstanding commercial real estate (CRE) loans. According to research results) Apollo.
“As long as interest rates remain high, it will be difficult for banks to avoid problems with CRE lending,” said William C. Martin, a short seller at Raging Capital Ventures. He decided to bet on NYCB following the bank’s collapse on January 30th. Earnings reports detailed real estate pain, and he thought the stock could fall further if real estate losses widen further.
Local banks suffer third credit downgrade as crisis drags on
New York Community Bank (NYCB) is dealing with the effects of a downgrade announced by a credit rating agency. (Photographer: Bing Guan/Bloomberg via Getty Images / Getty Images)
Martin, who sold Silicon Valley Bank short last year before its collapse, said he shorted NYCB because he believed the company’s profitability was declining and it might need to raise capital. NYCB said Wednesday that a capital increase is an option, but there are no plans to do so “at this time.”
The bank declined to comment on the short sellers’ views.
“Regional banks…are doubly affected by interest rates,” said Dan Zwaan, co-founder and CEO of distressed bond investment firm Arena Investors. He said he was avoiding real estate in 2019, citing rising interest rates in part as a reason. default risk. The KBW Regional Bank Index has fallen about 11% since the NYCB announcement.
The CRE market has been affected by the coronavirus disease (COVID-19) pandemic. Commercial mortgage-backed securities (CMBS) delinquency rates are expected to rise to 8.1% in 2024, according to Fitch, as many companies struggle to transition remote and hybrid workforces. . Meanwhile, the CMBS loan delinquency rate for commercial multifamily properties (residential properties with five or more units) is expected to reach 1.3% in 2024, compared to 0.62% in 2023.
| ticker | safety | last | change | change % |
|---|---|---|---|---|
| new york cb | NEW YORK COMMUNITY BANCORP INC. | 4.89 | -0.01 | -0.10% |
CRE also faces pressure from higher interest rates as about $1.2 trillion in commercial mortgages mature this year and next, according to research by Goldman Sachs.
Some are assigning greater risk to commercial multifamily assets in New York City.
What makes NYCB unique is its role as a primary lender to rent-stabilized landlords in New York City. The company said more than half of its total multifamily loan portfolio is secured by real estate in New York state, many of which are subject to rent control laws. New York’s rent-stabilized housing default rate is historically low, rising from 0.32% in April 2020 to 4.93% in December 2023 due to the pandemic and a 2019 law limiting landlords’ ability to raise rents. Stephen Bushbom said. , Research Director at real estate data provider Trepp.
Bank that bought failed community bank faces credit rating downgrade
As banks begin taking provisions for New York real estate more broadly, “we could see another wave of the crisis that started unfolding last year,” said Ortho, a short bank with outsized CRE exposure. said Nate Koppiker of Partners. He declined to elaborate.
Ratings agency Fitch is one of the companies that has downgraded NYCB’s credit rating in recent weeks. (Jakub Porzycki/NurPhoto via Getty Images / Getty Images)
High concentration
Some investors are focusing on banks with a high concentration of real estate lending. Martin said he was also short Ocean First and short Valley National, but he closed his position this month after taking a profit.
Like NYCB, both banks hold more than 300% of their total risk-based capital in CRE, according to Trepp data. According to the Federal Deposit Insurance Corporation’s (FDIC) public guidelines, this 300% level may indicate that the lender is at significant risk of CRE concentration. The FDIC did not respond to requests for comment.
Valley’s CRE holdings were 479% of total risk-based capital in the fourth quarter, compared to Ocean First’s 447%, according to Trepp data. As of the third quarter, NYCB’s ratio was 468%.
Nearly 1,900 banks with less than $100 billion in assets had CRE loan balances exceeding 300% of their capital, according to Fitch.
The full effects of Fed rate hikes are yet to be seen, US bank CEO warns
A security guard stands outside the entrance to Silicon Valley Bank’s headquarters on March 13, 2023 in Santa Clara, California. SVB was one of the local banks that failed last spring. (Reuters/Brittany Hosea-Small/Fox News)
Fitch said in a detailed report in December that if prices fall by about 40% on average, losses in CRE portfolios could cause a certain number of banks, mainly smaller ones, to fail.
Ocean First told Reuters the company has a “broadly diversified portfolio” with very low concentrations in central business district offices and rent-stabilized apartment buildings, and short interest in the stock is low. said.
NYCB did not respond to requests for comment on short selling and concentration risk. Travis Lunn, Valley’s deputy chief financial officer, said the bank is “pleased with our diverse and granular commercial real estate portfolio,” adding that the bank is “prioritizing balance sheet diversity.” ” he said.
loan sales
Investors expect some local banks may be forced to sell loans at a loss or increase their loss reserves. A distressed bond investor said some local banks with exposure to New York City’s rent-stabilized multifamily mortgages are starting to consider selling these and other assets.
NYCB said Wednesday that options could include loan sales and that the bank would be “focused on reducing CRE concentration.”
CLICK HERE TO GET FOX BUSINESS ON THE GO
However, Rebel Cole, a finance professor at Florida Atlantic University, said selling the loan may not be the best solution, as real estate values are now 50% to 75% lower than they were appraised at the time the loan was made. said.
“Many of the loans that were made in the last five to seven years are now in trouble,” said Ran Eliasaf, founder and managing partner of Northwind Group, a real estate investment firm that invests in New York’s multifamily market. I’m doing it,” he said.
