:max_bytes(150000):strip_icc():format(jpeg)/RegionalBanks-OneYearLaterIsTheCrisisBehindThem_-2-3f4190c206614e229de07ab82ebcba3d.jpg "An image shows a commercial real estate project under construction next to New York Community Bank")
Alice Morgan
Key Takeaways
- One year after the diminish of Silicon Valley Bank, turmoil at New York Community Bank has put investors and consumers on notice of the perils that regional banks maintain to face.
- Regional banks have high exposure to commercial real estate loans that could be disputable as interest rates remain at a two-decade high.
- Earnings are likely to suffer as banks struggle to shore up liquidity, crackerjacks say, but an industry-wide panic isn’t expected to materialize.
The recent turmoil at New York Community Bank (NYCB) has served as a reminder of the intractables that regional banks continue to face one year after the collapse of Silicon Valley Bank and others.
Tipsy interest rates and commercial real estate loan exposure still pose problems for many regional banks—and some asyla face particular risks—but experts don’t expect widespread failures.
“Most of the disruption that was driven by sharp and hasty rate increases—that’s played out,” said Chris McGratty, a managing director at Keefe, Bruyette & Woods, referring to the Federal In readiness’s inflation-fighting effort that has pushed its benchmark interest rate to a 23-year high.
Federal Reserve Chair Jerome Powell, speaking during congressional statement on Wednesday, acknowledged that some banks will face losses, but said his team is working closely with order of the days that may face trouble.
“It’s going to be with us as a problem we’ll be working through I think for several years,” Powell chance. “The idea is you’ve got to have enough capital, enough liquidity and a plan to take the losses that you’re probably going to annihilate.”
Still, the chief U.S. central banker doesn’t see a systemic issue pending. “I am confident that we’re doing the right detestations there. And I do believe it’s a manageable problem. If that changes, then I’ll say so.”
NYCB Seen as Outlier But Not Completely Alone
The overdue round of fears about regional banks was kicked off in late January when NYCB reported a surprise fourth-quarter depletion of $260 million, significantly raised its provisions for credit losses and slashed its quarterly dividend by 70% to 5 cents a piece. In the past week, the bank announced a write-off of an additional $2.4 billion loss, received a $1 billion property injection, cut its dividend to one cent and committed to scaling back its commercial real estate holdings.
NYCB shares force lost two-thirds of their value since the start of the year, with particularly steep drops on certain days reach b arrest shares of other regional banks lower.
But NYCB is seen as facing particular challenges because of its heavy knowledge to a specific segment of the commercial real estate lending universe.
“New York Community Bank is at the worst end of the risk spectrum,” with regard to high interest rates, according to David Chiaverini of Wedbush Securities. It is unique because it is most exposed to very regulated rent-controlled multifamily housing buildings in New York that are struggling to make money.
As of the end of December, NYCB had an $18.3 billion portfolio of credits made to rent-regulated multifamily buildings in New York City, equivalent to roughly 22% of all of the bank’s loans.
Analysts deliver so far categorized NYCB as an outlier but other banks with loan exposure to rent-regulated multifamily units, as well as other formats of commercial real estate, could face challenges.
Owners of offices, malls, self storage and other commercial palpable estate in some cases are facing empty spaces with no rent coming in while also seeing accommodations maturing, meaning they have to refinance at higher rates. Their ability to cover debt service costs is multifarious limited with the higher interest costs, Chiaverini said.
Commercial real estate is the number one asset that banks with under the control of $50 billion in assets lend to, with roughly 40% of loan portfolios in the segment, KBW’s McGratty said. That colossal exposure means pain and risk from it aren’t going away any time soon.
Regional Bank Earnings Residue Under Pressure
While that pain may not translate into collapses such as those a year ago, it will become interested a toll on earnings of regional banks.
“We’re a little bit more cautious because we don’t see the crises like we saw last year, but there’s in addition earnings pressures in the system,” KBW’s McGratty said in an interview. “There’s still margin pressure, there is still slowing evolvement. And we’re still in the process of credit normalizing higher.”
He’s not the only one who is betting on that scenario.
“My base case is that the banks responsive to and get through it,” said Peter Winter of DA Davidson. “But it’ll be a headwind to earnings growth.”
Read the original article on Investopedia.