International Finance
Banking Featured

IF Insights: After the March 2023 horror, US banking sector now faces ‘NYCB Test’

After the 2023 banking crisis, exposure to commercial real estate loans was seen as the next big risk to American banks

March 2023 was the ‘Crisis Month’ in the US banking sector. Silicon Valley Bank faced huge losses on its investment portfolio and a run on deposits. Experts pointed out the series of interest rate hikes from the United States Federal Reserve as the primary factor behind the phenomenon. And they were not wrong, as the Fed’s move (undertaken to tame inflation) created a liquidity crisis in the American economy and the smaller and mid-sized regional banks almost lost access to funds.

Fed had to bail out these struggling financial institutions, apart from giving an unconditional guarantee on deposits to the deposit holders and opening the liquidity taps.

As we arrive in March 2024, New York Community Bancorp is witnessing an extended negative run in the stock market, apart from replacing its CEO and identifying “material weaknesses in internal controls.”

Knowing The Topic In Detail

New York Community Bancorp’s shares have tumbled over 23% to close at their lowest since 1996, despite it repeatedly assuring the markets that the issues around its financial reporting will not impact its 2023 results.

Trouble for NYCB started after it posted a surprise fourth-quarter loss in January 2024 due to higher provisions tied to its exposure to the American commercial real estate (CRE) sector, and cut its dividend.

In February 2024, NYCB revised its quarterly loss to USD 2.7 billion, citing a USD 2.4 billion “goodwill impairment” tied to transactions from 2007 and before. The bank also named financial services veteran George Buchanan as its chief risk officer.

“The lender has now come under stricter capital and liquidity norms as its balance sheet exceeds the USD 100 billion regulatory threshold due to the acquisition of Flagstar and purchase of some assets of failed Signature Bank,” Reuters reported.

NYCB’s shares have slumped over 73% so far in 2024 as worries related to its CRE sector exposure spilt over globally. The KBW Regional Banking Index, a key gauge of investor sentiment towards the sector, has also gone down by 12%.

NYCB has reported a surprise write-off of an additional USD 2.4 billion loss, apart from sacking its CEO of nearly 30 years. The venture has also received ratings downgrade from Fitch and Moody’s.

Investment banking major Piper Sandler’s market peer DA Davidson noted that since Moody’s downgraded NYCB’s credit rating, the bank has not provided more information about its deposits.

Identifying NYCB’s problems

NYCB has a USD 18.3 billion portfolio of loans made to rent-regulated multifamily buildings in New York City. It equalled roughly 22% of all of the bank’s loans by the 2023 end. High interest rates, persistent inflation and a downgrade in property values have reportedly put these building owners in a situation where they can’t pay back the loans. Add the American city’s 2019 rent stabilisation legislation, which makes it harder for landlords to hike rents.

“Valuations for many buildings are dipping below the outstanding principal balances on related mortgages,” wrote David Chiaverini, an analyst at Wedbush Securities, while further giving the example of a real estate broker who purchased a rent stabilised building in 2017 for USD 12.5 million, only to sell it for USD 6 million after pumping USD 1 million into renovations. Throughout these seven years, the person’s equity got erased, with NYCB taking a loss on the loan as well.

After the 2023 banking crisis, exposure to commercial real estate loans was seen as the next big risk to American banks, and it seems the prediction has come true in NYCB’s case. Analysts now consider loans for both multifamily rent-stabilised properties and office spaces becoming “High Risks” for the American banks.

While a lot of commercial real estate loans, including those for multifamily units, are starting to come due, high interest rates are making it harder to refinance these units.

For NYCB and other banks, liquidity and capital building should be the road ahead to deal with this crisis, said Chris McGratty, managing director at Keefe, Bruyette & Woods. NYCB has the option of selling its non-core assets and reducing the risk-weighted ones. For the bank’s depositors, the United States Federal Deposit Insurance Corporation (FDIC) will be providing deposit insurance for up to USD 250,000 worth of deposits, if the 2023 situation repeats.

As of February 6, roughly 72% of NYCB’s USD 83 billion total deposits were FDIC insured. Uninsured deposits, which likely exceed the USD 250,000 deposit insurance limit, stand at USD 22.9 billion.

Guessing The Reason

NYCB got just under USD 40 billion in assets from the Signature Bank takeover in 2023. The venture’s shares jumped from USD 6 to as high as USD 14 in response to the rescue deal. Now in March 2024, the same business is taking a write-down on loans, with the stock price going into a freefall.

According to former hedge fund analyst Ian Bezek, New York Community Bancorp was willing to purchase Signature precisely because the FDIC gave it such a steep discount on its loans.

During the Signature rescue deal, NYCB recorded a USD 2.2 billion immediate gain on its purchase of Signature, since the venture bought assets at a considerable discount to stated fair value.

NYCB also got Signature’s deposit base, giving the bank access to tons of no- and low-cost deposits at a time when NYCB needed more deposits to replace 5% CDs (Certificate of Deposits). NYCB benefited greatly from the immediate USD 2.2 billion profit, as its net interest margin jumped considerably from getting access to Signature’s lower-cost funding base.

However, NYCB also took a provision for potential future credit losses, raising its overall bad loan reserves by USD 373 million to USD 1.0 billion, far higher than anyone had expected.

NYCB now has provisioned USD 993 million against loan losses, whereas it only has USD 428 million of actual non-performing loans as of its recent quarterly filing. To simplify things, NYCB has capital provisions well over its troubled assets. The venture still looks in an acceptable shape. The tangible book value per share of last quarter’s announced credit write-offs and provisions is USD 10.06 per share.

After buying Signature, NYCB crossed the threshold to become a USD 100 billion asset bank, which made it a Category 4 operation. Category 4 banks have less discretion in how they manage their affairs and reserve against losses as compared to smaller banks. They face more scrutiny from authorities.

Bezek believes that the Office of the Comptroller of the Currency (OCC) was eager to demand more credit provisioning and higher capital reserves from the NYCB. The bank had to increase its loan loss provisions significantly and increase its capital reserves. All these resulted in the venture’s stocks plunging. He also envisions things settling down for the venture, rather than NYCB becoming the ‘Fallen One’.

Troubled Path Ahead?

As NYCB’s investors continue to dump its stocks, chances of the US’ swelling commercial real estate debt bubble looms larger. Fears are growing that regional banks may be dangerously exposed to high rates of defaults as nearly USD 1 trillion in loans comes due in 2024. Analysts fear that the NYCB crisis, if not dealt properly, may spread to wider financial markets and freeze access to credit that small businesses rely on.

NYCB officials have maintained that the bank still had USD 83 billion in deposits on hand. However, with ratings downgrade from Moody’s and Fitch, along with the investor stock selloff, there are concerns around NYCB’s solidity, along with the worry of whether the other regional banks will get exposed in the upcoming CRE debt payment season.

Analysts also see the rating downgrade triggering contractual obligations from business clients of NYCB who require the bank to maintain an investment-grade deposit rating. The bank’s fund flow will be affected in two areas, a “Banking as a Service” business with USD 7.8 billion in deposits, and a mortgage escrow unit with between USD 6 billion and USD 8 billion in deposits.

What's New

Business Leader of the Week: Meet Vladimir Sergeyevich Lisin, Chairman of NLMK Group

IFM Correspondent

Oman’s dropshipping start-up to help entrepreneurs launch online businesses

IFM Correspondent

IF Insights: Is cryptocurrency market going to witness potential Altcoin season?

IFM Correspondent

Leave a Comment

* By using this form you agree with the storage and handling of your data by this website.