About a year ago, the wave of bank bankruptcies in the United States triggered by the collapse of Silicon Valley banks seemed to be vividly remembered, but now, the US financial market is facing another storm.
Prior to trading on Wednesday, January 31 Eastern Time, New York Community Bank Limited (NYCB) reported an unexpected loss of $260 million in the fourth quarter of 2023, in stark contrast to analysts' previous expectations of a profit of $206 million.
After the financial report was released, NYCB fell sharply, with a 42.6% drop at the beginning of the trading day. At one point, it fell more than 46%, and the day ended in a 37.7% decline, marking the largest intraday and closing decline for the bank since its listing in November 1993. This far exceeded the bank's largest decline during the 2008 global financial crisis and wiped out its rebound gains after last year's Silicon Valley banking crisis. This makes the market feel a hint of hidden concern. On Thursday (February 1st), NYCB continued to decline by 11.13%, followed by a slight rebound of 5.04% on Friday (February 2nd). The cumulative decline from Wednesday to Friday is 42.15%.
More noteworthy is that on the same day that NYCB's financial report shattered market confidence, the Federal Open Market Committee (FOMC) of the Federal Reserve decided for the fourth consecutive time to keep interest rates at a high level, and Federal Reserve Chairman Powell shattered market expectations for a rate cut in March. Not only that, FOMC's latest policy statement quietly removed claims that the banking system is "robust and resilient", as well as that tightening credit conditions may drag down the economy, which undoubtedly added another layer of anxiety to the market.
Is this the root cause of deeper problems, and is the Silicon Valley Banking Crisis 2.0 imminent?
Yahoo Finance
"The long-term maintenance of high interest rates by the Federal Reserve can lead to losses for banks due to rising interest rates, but these losses have already been provisioned for. The case of NYCB is unique," said Rick Roberts, former risk credit director of the Federal Reserve, in an interview with the Daily Economic News
In his view, NYCB's profit fluctuations in the fourth quarter of 2023 were mainly due to the bank's unique one-time provision payments, rather than broader banking issues in the US region.
NYCB's performance exploded, with loan loss provisions more than 10 times higher than analyst expectations
On January 31st Eastern Time, NYCB released its financial report for the fourth quarter of 2023. The data shows that the bank suffered a loss of $260 million, far from the analyst's previous expectation of a profit of $206 million, while the bank earned a profit of $172 million in the same period of 2022. During the reporting period, there was a loss of $0.36 per share, which turned from profit to loss compared to the same period last year.
At the same time, NYCB announced a 5 cent cut in dividends, far below analysts' expectations of maintaining dividends at 17 cents, mainly to meet regulatory capital requirements for fourth tier banks with assets ranging from $100 billion to $250 billion. According to Reuters, NYCB acquired some assets of the bankrupt Signature Bank last year, and with the acquisition of Flagstar Bank in 2022, its asset size reached $116.3 billion, making it one of the 30 largest banks in the United States. According to regulatory regulations, NYCB needs to reserve more capital and loss provisions.
The financial report shows that during the reporting period, NYCB's loan loss provision was $552 million, more than 10 times higher than the analyst's forecast of $45 million, and far exceeding the previous quarter's $62 million. Reuters reported that this indicates that its credit situation is deteriorating.
Moody's, a rating agency, has stated that it has included all long-term and short-term ratings and evaluations of NYCB and its subsidiary, Star Bank, on a potential downgrade observation list. Brokerages have also made adjustments to NYCB's rating, for example, Raymond James analyst Steve Moss downgraded NYCB's rating from "strongly recommended" to "on par with the market.".
The sharp decline of NYCB has also dragged down regional bank stocks in the United States. On Wednesday, the KBW Regional Banking Index and the KBW Nasdaq Regional Banking Index (KRX) both closed down about 6%, marking the largest daily decline since the collapse of Silicon Valley banks on March 13, 2023. Record the largest daily decline since March 13th last year. Among the constituent stocks, Valley National Bancorp closed down about 7%, while Citizens Financial Group fell more than 4%.
The capital market was also caught off guard. The Daily Economic News reporter noticed that Trade Alert data shows that option traders supported by SPDR Standard&Poor's regional bank exchange traded funds have been bullish towards US regional banks, especially in the short term. On the day of the NYCB crash, as investors expected a more bleak outlook, the trading speed of these options was four times faster than usual, and the put options of these options were as much as three times faster than the call options on that day.
Former Federal Reserve Official: Will Not Lead to a Wider Regional Banking Crisis
The Wall Street Journal reported that the explosive performance of community banks in New York City has reminded some investors of the US banking crisis that occurred in early 2023. Silicon Valley Bank and First Republic Bank both closed within weeks, triggering a crisis of trust among depositors and investors in regional banks.
More noteworthy is that on the same day as the release of NYCB financial reports, the FOMC kept interest rates at a high level for the fourth consecutive time, and Federal Reserve Chairman Powell shattered market expectations that the FOMC would start cutting rates at its March meeting at a subsequent press conference, further exacerbating investor anxiety. According to a Reuters report, high interest rates aimed at curbing inflation have dragged down loan profits and the value of securities held by banks in the US region.
In addition, a reporter from the Daily Economic News noticed that the latest policy statement released by FOMC removed the notion that the banking system is "robust and resilient" and that tightening credit conditions may drag down the economy.
Rick Roberts, former risk credit director of the Federal Reserve, pointed out in an interview with the Daily Economic News that the Fed's long-term maintenance of high interest rates would lead to banks facing losses due to rising interest rates, but these losses have already been provisioned for.
He further explained to reporters, "NYCB's situation is unique. The bank's total asset size as of the end of 2023 has exceeded $100 billion, classified as another more stringent regulatory category by the Federal Reserve, leading to further increases in NYCB's provisions. In this sense, NYCB's profit fluctuations seem to be mainly due to the bank's unique one-time provision payments, rather than broader regional banking issues."
Regarding the stock price of NYCB in recent days, Rick Roberts said, "Due to investors' confusion about NYCB's significant losses and their impact on banks in other regions, the overall market value of the sector has declined in recent days."
A strategist at Bank of America, led by Yuri Seliger, also wrote in a report to clients that a series of earnings reports recently released by the six major banks and regional banks in the United States have shown that their financial conditions are improving. "This suggests that NYCB's unexpected situation may be a singular event, not an indicator of broader issues."
Some analysts also pointed out that NYCB's problems are mainly caused by its balance sheet, and the overall banking stocks have not faced the same level of pressure as in March last year.
Still need to be vigilant about commercial real estate risks
Although NYCB's performance losses are due to excess loss provisions, the commercial real estate industry risks faced by regional banks in the United States in a high interest rate environment are still not to be underestimated.
Bloomberg reported that the reason NYCB recorded its largest daily decline in over 30 years since going public on Wednesday was because investors were concerned that NYCB may be a precursor to the collapse of commercial real estate in the United States.
According to a report from four universities including Stanford University, as of the end of the third quarter of 2023, the US banking industry held approximately $2.7 trillion in commercial real estate debt. The decline in commercial real estate value may increase the solvency risk of hundreds of US banks. According to data from real estate analysis firm Green Street, since the Federal Reserve began raising interest rates to combat inflation, the value of commercial real estate in the United States has fallen by 22%.
A report released by JPMorgan Chase in April last year showed that commercial real estate loans accounted for 28.7% of small bank assets, while the proportion of large banks was only 6.5%. This means that small banks have a greater risk exposure to commercial real estate.
"Regional banks are indeed facing actual pressure from the upcoming maturity of commercial real estate loans, requiring refinancing and then write down because the value of collateral is now lower. However, it should also be pointed out that most banks have already set aside loan loss provisions for this. The key issue is whether they are sufficiently lenient when recording expected commercial real estate loan losses (with book funds remaining)." Rick Roberts said The reporter from the Daily Economic News explained.
Bloomberg cited data from data provider Trepp as stating that by the end of 2025, major US banks will face approximately $560 billion in commercial real estate loans due, accounting for more than half of the total real estate debt due during the same period.
As for whether the turbulence in commercial real estate will trigger a deeper crisis, Kashif Ansari, co-founder and CEO of Juwai IQI Group, a global real estate technology company headquartered in Kuala Lumpur, told a reporter from the Daily Economic News, The current predicament faced by commercial real estate is unlikely to trigger a banking crisis similar to 2008. According to relevant research data, about a quarter of commercial real estate loans from small banks in the United States are used for office buildings. Even if half of office building owners return their properties to the bank, banks may still recover some funds by selling assets at a significant discount. Compared to residential mortgage loans, the standards for commercial real estate loans are also stricter. Therefore, the losses incurred by these small banks in office buildings will not cause significant damage to their assets. Of course, the situation varies among banks, and some institutions may encounter serious problems
Disclaimer: The content and data in this article are for reference only and do not constitute investment advice. Please verify before use. Based on this operation, the risk is borne by oneself.