Local banks are setting aside more funds to deal with future losses in commercial real estate. Some analysts now worry that it won't be enough.
New concerns surface as the turmoil surrounding New York Community Bancorp (NYCB) raises concerns about the industry's exposure to office buildings and apartment complexes whose values have suddenly fallen sharply due to high interest rates and changing work patterns. There is.
Analysts say many other regional banks may have to set aside more cash this year to absorb future losses from commercial real estate with additions to their balance sheets called “provisions.” They claim it's expensive.
Banks typically make additional provisions and record this as an expense when credit deterioration is expected. The more a bank adds to its reserves, the more profits are likely to fall.
New York Community Bancorp surprised Wall Street last week by announcing that its reserves rose to $552 million from $62 million a year earlier. This caused him a net loss of $260 million in the fourth quarter. The company's stock price fell more than 48% by Monday and was down another 14% in Tuesday morning trading.
“We believe the consensus on 2024 provisioning costs for nearly all banks covered is too low,” Morgan Stanley regional bank analyst Manan Gosalia said in a research note Friday.
“I definitely think we're going to see higher reserves across the industry,” David Chiaverini, a regional bank analyst at Wedbush Securities, added in an interview with Yahoo Finance.
Investors and analysts are also concerned about whether regulators might force banks to build up more of those reserves.
Bloomberg reported Monday that officials at the Office of the Comptroller of the Currency pressured New York Community Bancorp to set aside more capital and cut its dividend in case commercial real estate lending stalls. .
The $116 billion bank has a high level of exposure to rent-controlled apartment buildings in New York City. These buildings account for 22% of the loan.
New York Community Bancorp announced last week that its reserve-building efforts are in response to stricter capital regulations that apply to financial institutions with assets of $100 billion or more. It exceeded this standard last year when it merged with part of Signature Bank, which went bankrupt.
Regulators now “basically keep calling us, saying, 'What does your commercial book look like?'” Chris Whalen of Whalen Global Advisors told Yahoo Finance.
Whalen added that regulators are concerned that banks could be “tarred and feathered” by investors with increased exposure to commercial real estate.
Shares of many other local banks with heavy exposure to commercial real estate, such as New Jersey financial firm Valley National (VLY), also fell last week.
“What's really frustrating about NYCB and other banks with commercial exposure is that they knew months ago that the OCC was requesting a preemptive increase in capital and loan loss reserves,” Whalen said. stated in a separate research note.
“Why? Given that commercial real estate valuations in some parts of the $20 trillion market are plummeting, and defaults will spike accordingly in 2024.”
“The severity of the problem could be said to be unique to New York Community Bank, as reserves were severely underfunded relative to the risks in the portfolio,” Chiaverini said.
But Chiaverini said there is still a “perfect storm” that could cause problems for the industry as a whole. If inflation rises again, the Fed will be forced to keep interest rates high for an extended period of time, pushing the U.S. economy into recession. This would make it difficult for the borrower to continue repaying the loan.
If this doesn't happen, commercial real estate pain should be “manageable” for banks, he added.
David Hollerith is a senior reporter at Yahoo Finance, covering banking, cryptocurrencies, and other financial areas.
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