Key Point
- Shares of New York Community Bank fell 37% after a fourth-quarter loss on bad debts in commercial real estate.
- The S&P Regional Bank Index ETF has fallen 5.73% over the past week.
- Local banks rely heavily on commercial mortgages, including those for office buildings, which come with risks as remote work trends increase risk for lenders.
- 5 stocks we like better than New York Community Bancorp
Is the local banking crisis that first reared its ugly head nearly a year ago about to return?
New York Community Bancorp, Inc. New York Stock Exchange: New York CB Shares plunged more than 37% on Jan. 31 after the regional lender reported a surprise loss of $260 million in the fourth quarter.
The bank cited non-performing loans in commercial real estate, particularly apartments and offices.
This resulted in a loss of 27 cents per share for the quarter. New York Community Bancorp's earnings data shows just how deep its losses are. Analysts had expected him to earn 29 cents per share, but a loss of 27 cents per share was nowhere in the world.
Significant dividend reduction
The bank also cut its dividend by 70% and appointed a new executive chairman.
New York Community Bancorp's dividend yield is currently 16.23%, an example of a troubled company whose yield is rising as its stock price tumbles.
of SPDR S&P Regional Banking ETF NYSEARCA: KREThe magazine, which tracks an index of the same name, also harshly criticized the New York Community Bancorp news amid widespread pessimism across the industry. The ETF has fallen 5.73% over the past week.
The index's largest components and their one-week returns are:
New York Community Bancorp immediately scheduled a conference call with investors to try to stem the bleeding, but that appears to have failed, as you can see from New York Community Bancorp's chart.
Debt is downgraded to junk status
Adding to the pain, bond rating agency Moody's downgraded the bank's long-term debt rating to junk.
Downgrading a bank's debt to junk bond status indicates an increased risk of default and undermines investor confidence in the bank's financial stability. This increased risk perception often increases borrowing costs for banks, reducing profitability and further depressing stock prices.
New York Community Bancorp's stock has fallen 30.76% over the past week.
The problem this time is real estate, not long-term bonds.
This downturn in local banking is different from last year in that it is driven by commercial real estate defaults.
The events that caused local banks to fail in 2023 were caused by Silicon Valley banks and several other companies buying long-term bonds without any protection against the Fed's fast-paced interest rate hikes.
Long-term bonds are at risk when interest rates rise. This is because fixed interest payments become less attractive to new investors compared to newly issued bonds that offer higher interest rates.
This reduces demand for existing bonds and causes prices to fall. When investors try to sell long-term bonds, they incur losses.
Local banks in crisis due to bad mortgage loans
However, local banks are lenders that provide commercial mortgage loans in their area. Some of these banks may have overestimated the borrower's ability to repay the debt or may not have charged interest rates high enough to make it worth the additional risk.
The federal government is taking notice.
Treasury Secretary Janet Yellen raised concerns about local banks at a recent Congressional committee hearing, saying they would “ensure that loan loss reserves are built to cover losses” and that “dividend policies are appropriate. “Regulators are working with banks to ensure this,” he added. ”
She added: “While some institutions may be quite stressed by this issue, I believe this issue is manageable.”
Working from home puts office loans in jeopardy
Meanwhile, local banks continue to rely heavily on commercial mortgage loans, with a significant portion of their loan portfolios tied to real estate such as office buildings, apartments, shopping malls and hotels.
As more employees work from home instead of commuting to office buildings, these loans could become increasingly risky, and defaults could increase as local banks have that problem. .
At this point, it seems unlikely that big investors will flock to the local banking sector to snap up bargains. The consensus among analyst ratings for New York Community Bancorp is “Reduce,” which is something you don't see very often.
It's wise to be wary of this part of the banking industry, as investors, regulators, and bond valuers are watching the industry very closely. However, large bank stocks have very different business models and multiple sources of income and are immune to this particular problem of real estate portfolio defaults.
Hear this before considering New York Community Bancorp.
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