Regional banks are facing renewed fears of a crisis after New York Community Bancorp (NYCB) posted a surprise $637 million loss in the fourth quarter of 2023, slashed its dividend by 71%, and set aside more funds to cover potential losses in its loan portfolio. The news sent NYCB’s stock price plunging by over 40% and sparked a sell-off across the regional banking sector.
NYCB Takes Shocking Loss Amid Real Estate Loan Fears
NYCB took Wall Street by complete surprise on Tuesday when it reported a net loss of $636.7 million for the fourth quarter. This compares to a profit of $120.4 million in the same period a year ago. The loss was driven by NYCB setting aside $926 million for potential credit losses as it braces for defaults in its $56 billion commercial real estate loan portfolio.
In addition, NYCB cut its quarterly dividend by a staggering 71% to $0.17 per share. The bank has prided itself on delivering strong dividends to shareholders, but is now conserving capital to cover impending losses.
The shock results immediately raised fears that NYCB is the ‘canary in the coal mine’ for issues plaguing the broader regional banking sector. NYCB’s stock price plunged 37% on Wednesday in the aftermath of the earnings release. The selloff wiped out over $4 billion of NYCB’s market value, knocking it out of the league of banks with over $100 billion in assets.
| Key Figures from NYCB’s Q4 2023 Earnings | |
|---|---|
| Earnings Per Share | -$3.06 (loss) |
| Net Income | -$636.7 million (loss) |
| Loan Loss Provisions | +$926 million |
| Dividends Per Share | Cut 71% to $0.17 |
The sharp decline in NYCB stunned analysts and demonstrates fears surrounding the health of regional banks. As real estate markets show further signs of weakening in 2023, banks with heavy exposure to commercial real estate loans seem destined for trouble.
Regional Bank Selloff Accelerates
The terrible results from NYCB set off alarm bells across the regional banking sector. The KBW Nasdaq Regional Banking Index has plunged over 9% year-to-date, compared to a modest gain for the broader market. Regional banks were already under pressure, but NYCB’s loss provided the spark for an accelerated selloff.
Names like SVB Financial and First Republic Bank saw their stocks decline 5-10% this week after the NYCB earnings release. Traders are growing increasingly worried about declining real estate values hurting banks’ collateral and balance sheets.
Many analysts downgraded NYCB stock and/or cut their price targets. Investment bank Keefe, Bruyette & Woods slashed its rating to ‘Underperform’ and warned that NYCB may need to raise capital if loan losses exceed reserves. RBC Capital downgraded NYCB to ‘Sector Perform’ and described the results as an “extinction level event.”
Clearly, market participants see rising risks for regional banks, especially those with large multifamily and commercial real estate loan exposures. If macroeconomic conditions deteriorate further, more banks may need to slash dividends and raise loan loss reserves like NYCB.
Bracing for Defaults in Commercial Real Estate
At the heart of NYCB’s shocking loss are its concerns over the commercial real estate market, especially in the multifamily sector. With demand declining and vacancies rising, property values are falling and delinquencies are increasing.
NYCB has a loan portfolio of $56 billion, with nearly 80% tied to multifamily and commercial real estate properties centered in New York City. As the New York real estate market shows further signs of cracking in 2023, NYCB is bracing for defaults and losses.
The bank revealed that loans in deferral rose to $1.3 billion in Q4, up from just $165 million a year ago. Additionally, non-performing loans spiked to $1.05 billion, nearly 5 times higher than Q4 2021 levels.
These rising delinquencies and the overall slowdown in commercial real estate market is what drove NYCB’s decision to boost loan loss provisions by 13-fold to $926 million last quarter. The bank is setting aside capital to cover the wave of impending defaults and losses.
Other regional banks with heavy NYC real estate loan exposure also declined sharply this week, indicating similar concerns about the market. Dime Community Bancshares, Signature Bank, and Customers Bancorp were each down 8-12% since the NYCB earnings release.
What Happens Next
The terrible results from NYCB combined with the ongoing slide in regional bank stocks demonstrates that last year’s banking crisis may not be over. If macroeconomic weakness persists and commercial real estate crater, more regional banks will likely need to take drastic measures like NYCB did.
The Fed attempted to orchestrate a “soft landing” for the economy with its aggressive rate hikes in 2022. But the central bank has limited ammunition after bringing rates to the highest level since 2007. Most economists expect a recession in 2023.
As consumers and businesses pull back spending amid high inflation and rates, commercial real estate will bear the brunt of the slowdown. Falling property values and more defaults appear imminent. For regional banks with concentrated exposure like NYCB, the pain has already begun.
More dividend cuts, credit downgrades, capital raises, and government interventions may be on the horizon. It seems the banking crisis is still alive, which spells further trouble for regional lenders, real estate markets, and the overall economy. Brace for more volatility ahead.
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