“Regional Banks Face Investor Scrutiny as New York Community Bancorp’s Real Estate Exposure Raises Concerns”


Regional Banks Face Investor Scrutiny as New York Community Bancorp’s Real Estate Exposure Raises Concerns

Investor scrutiny around regional banks has intensified following New York Community Bancorp’s exposure to commercial real estate (CRE). This has raised concerns about the health of smaller banks, particularly those with office and multifamily property loans. The collapse of Silicon Valley Bank in 2023 triggered a regional banking crisis, and now investors are combing through portfolios of regional banks, as small banks account for nearly 70% of all CRE loans outstanding.

The recent earnings release from NYCB, which led to a 60% drop in its shares, has brought the issue into focus. Short-seller William C. Martin of Raging Capital Ventures believes that as long as interest rates remain high, regional banks will struggle with CRE loans. He has placed a bet against NYCB, anticipating further losses in real estate and a potential need for the bank to raise capital.

Dan Zwirn, CEO of distressed debt investment firm Arena Investors, is avoiding real estate for the next year or two due to the higher risk of default. The KBW Regional Banking index has also seen a decline of around 11% since NYCB’s announcement.

The COVID-19 pandemic has had a significant impact on the CRE market. Delinquency rates on commercial mortgage-backed securities (CMBS) are expected to rise to 8.1% in 2024, as many companies struggle with remote and hybrid-working arrangements. Additionally, CMBS loan delinquencies in commercial multifamily properties are projected to reach 1.3% in 2024, compared to 0.62% in 2023.

Higher interest rates have added further pressure to the CRE market, with approximately $1.2 trillion in commercial mortgages set to mature this year and next. Some experts have also assigned greater risk to commercial multifamily assets in New York City.

One unique aspect of NYCB is its role as a major lender to rent-stabilized landlords in New York City. More than half of its total multifamily loan portfolio is secured by properties in New York state, many of which are subject to rent regulation laws. The default rate on New York’s rent-stabilized housing has historically been low but has risen significantly due to the pandemic and a 2019 law limiting landlords’ ability to raise rents.

Investors are particularly concerned about banks with a high concentration of real estate loans. Data from Trepp shows that both OceanFirst and Valley National, in addition to NYCB, have CRE holdings as a proportion of total risk-based capital above 300%. According to guidelines from the Federal Deposit Insurance Corporation (FDIC), this level of concentration indicates significant risk. Fitch has warned that if prices decline by approximately 40% on average, losses in CRE portfolios could result in the failure of a moderate number of smaller banks.

Some regional banks may be forced to sell loans at a loss or increase provisioning for losses. Distressed debt investors have reported that regional banks with exposure to New York City’s rent-stabilized multifamily loans are exploring sales of these assets. NYCB has stated that options could include loan sales and a focus on reducing CRE concentration.

However, selling loans may not be an optimal solution as property values have declined significantly since the loans were struck. Properties are now valued 50%-75% below their original valuations, making it challenging for banks to recoup their losses.

Overall, regional banks are facing increased scrutiny due to their exposure to commercial real estate. The collapse of Silicon Valley Bank last year has heightened concerns, and NYCB’s recent earnings release has further raised alarm bells. With the CRE market facing challenges from the pandemic and higher interest rates, investors are closely monitoring the health of regional banks and their ability to navigate these uncertain times.

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