The ghosts of the collapse of regional banks last year still haunt the banking sector

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Federal Reserve officials on Wednesday removed language from a key policy statement describing the U.S. banking system as “sound and resilient,” a phrase it has used since March 2023 to reassure the public that regional lending problems have been contained.

On the same day, new turmoil at a regional New York bank served as a reminder that these problems are far from over.

New York Community Bancorp (NYCB) Wall Street was shocked when iIt cut its dividend, reported a surprise quarterly loss and stored millions to offset future loan losses. The Hicksville, New York-based bank’s stock fell 37% on Wednesday and another 11% on Thursday, dragging the rest of the sector down with it.

The New York Bancorp community has doubled its size over the past two years. (Photo by Lev Radin/Pacific Press/LightRocket via Getty Images) (Pacific Press via Getty Images)

Shares of several other mid-sized lenders such as Valley National Bancorp (VLY), United Bank (Bako(and the Western Alliance)Wall) also took major hits on Wednesday and Thursday as investors punished many sector names. The index, which tracks medium-sized banks, also fell 9% in two days.

“It’s definitely a sell now, ask questions later,” Alexander Yocum, a regional banking analyst at CFRA, told Yahoo Finance.

Some experts urged caution, noting that the challenges facing the New York Bancorp community do not apply to the entire sector.

“We see the issues affecting New York Commercial Bank as corporate-specific matters with little read into the broader regional banks,” said Stephen Alexopoulos, of JPMorgan Chase.JBM) the regional bank analyst said in a note on Thursday.

These events offered little callback to the chaos of 11 months ago, when concerns about the safety of deposits at regional banks spread across the country. Ultimately, these concerns led to the collapse of three large institutions — Silicon Valley Bank, Signature Bank, and First Republic — which were seized by regulators.

A number of factors help explain the new concerns in the market, from concerns about vulnerabilities in commercial real estate to stricter regulations imposed on regional lenders of a certain size.

But the fundamental questions about this section of the banking industry are the same as they were last March: How weak are the balance sheets of regional lenders? Can they bear the pain of a Fed rate hike?

Can it eventually be profitable and survive in the pocket between a coast-to-coast giant like JP Morgan and thousands of small community banks in small towns across America?

One crisis created another crisis

The irony of New York Community Bancorp’s current predicament is that it can be traced in part to the company’s attempts to play savior during the 2023 crisis, when it stepped in to buy the assets of collapsed Signature Bank from regulators just months after it was acquired. Another competitor.

The rapid consolidation doubled the size of the institution and pushed the bank above the critical asset threshold of $100 billion, imposing stricter regulatory requirements on lenders of that size.

The company said these requirements help explain why it had to strengthen its balance sheet by reducing its dividend and increasing the money it set aside for future loan losses.

“They got the signing assets at a discount, which sounded pretty good, but what worries me now is that unfortunately it was too much,” Yoakum said. “If you are larger and more diverse, you are less likely to experience one of these shocks directly.”

This new challenge for one of the nation’s 30 largest banks may help spark a larger debate in the world of regional banking about whether it is better to continue consolidating and expanding, or to get smaller as a way to avoid new regulatory demands that could hamper profits.

PNC Financial Services Group CEO Bill Demchak He took the first view last month when he told analysts that corporate clients would eventually migrate to national giants with tacit government support..

United States - September 21: William Demchak, CEO of PNC Financial Services Group, testified during a House Financial Services Committee hearing entitled

William Demchak, CEO of PNC Financial Services Group, said it was very important for his regional bank to become a coast-to-coast brand. “Size matters.” We’ll have to play that game. (Tom Williams/CQ-Roll Call, Inc via Getty Images) (Tom Williams via Getty Images)

“So it’s critical for his Pittsburgh-based bank to take it to the next level” and be known “coast to coast as a standard brand everywhere,” he said.

“Size matters,” he added. “We’re going to have to play that game.”

But expansion, as New York Community Bancorp has discovered, also brings new obstacles that can quickly turn into profitability problems. Regulators are also currently considering new rules that would make capital requirements on regional banks more stringent.

As a result, some regional banks are trying to become smaller by eliminating loans, investments and business lines.

When the regional lender U.S. Bancorp (USB(which announced last October that it had agreed to cap its assets and shrink its balance sheet as a way to avoid tougher regulation from the Federal Reserve, and its stock rose 7% in one day.

“You need to shrink if you’re not healthy,” Yoakum said.

Commercial real estate concerns

New York Bancorp turmoil raises another sector-specific concern: commercial real estate.

The New York Mercantile Bank is largely a commercial real estate lender, and there have been concerns about the struggles such banks face as the value of office properties and multifamily apartments declines due to rising interest rates and the impact of the pandemic that has emptied many downtown buildings.

Regional banks are particularly vulnerable because they have much greater exposure to that real estate than larger competitors. Trillions of these loans are expected to become due in the next few years.

This issue is under scrutiny by regulators. “All of the banking regulators are working with banks that have, you know, concentrations of distressed real estate to solve this problem,” Federal Reserve Chairman Jerome Powell said late last year at the Economics Club of New York.

Federal Reserve Chairman Jerome Powell speaks during a Fed monetary policy press conference at the Federal Reserve Board, Wednesday, January 31, 2024, in Washington.  (AP Photo/Alex Brandon)

Federal Reserve Chairman Jerome Powell. (AP Photo/Alex Brandon) (News agency)

In the case of New York Community Bancorp, a single office loan and a cooperative loan were largely responsible for the sharp rise in net charge-offs to $185 million from $1 million in the same period the previous year.

It also set aside $552 million for future loan losses, a sign that it expects further credit deterioration.

“They have to build reserves,” said Christopher Marinac, an analyst at Janney who has covered banks for more than three decades. “They’re catching up. I don’t think the company really has losses to make, but they have to build their protection around the unknown of credit risk.”

There were other reminders on Thursday outside the US about the potential for more problems to come. Germany’s Deutsche Bank and Japan’s Aozora Bank revealed new vulnerabilities in commercial real estate on Thursday, spooking investors.

But the head of another US regional bank, Citizens (CFG), played down larger concerns about the industry in an interview with Bloomberg Television.

“For the most part, it’s all in the rearview mirror now,” Chief Executive Bruce Van Saun said during a day in which his bank’s shares fell more than 4%.

He said most regional banks were able to manage interest rate risks while deposit pressures eased for 2023.

“So things started to feel a lot more normal,” he said. The New York Commercial Bank’s announcement was “a bit of a surprise.” “I think this is strange.”

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