Traders work at the New York Stock Exchange (NYSE) in New York City, U.S., on February 7, 2024.
Brendan Mcdermid | Reuters
Lender in conflict New York Community Bank revealed a litany of financial metrics over the past 24 hours in a bid to calm skittish investors.
But one of the most crucial resources for any bank seems to be in short supply lately for NYCB: trust.
The regional bank said late Tuesday that deposits were stable at $83 billion and that the company had ample resources to cover any potential outflow of uninsured deposits. Hours later, he promoted President Alessandro DiNello to a more hands-on management role.
The moves sparked a 6% jump Wednesday in NYCB shares, a small dent in the stock's more than 50% drop since the bank reported fourth-quarter results last week. On Thursday, shares of the Hicksville, New York-based lender resumed their decline, falling more than 6%.
“There is a crisis of confidence here,” said Ben Emons, head of fixed income at NewEdge Wealth. “The market does not believe in this management.”
Amid the free fall, ratings agency Moody's cut the bank's credit ratings by two notches, citing challenges in risk management as the company searches for a pair of key executives. To make matters worse, NYCB was hit with its first shareholder lawsuit on Wednesday over the stock's collapse, alleging that executives misled investors about the status of their real estate holdings.
The sudden fall of NYCB, considered one of last year's winners after acquiring the assets of Signature Bank, revived fears about the situation of mid-sized American banks. Investors worry that losses on some of the $2.7 trillion in commercial real estate loans held by banks could trigger another round of turmoil after runs on deposits consumed Silicon Valley Bank and Signature last March. .
Real estate
Last week, NYCB said it was forced to stockpile much more cash to cover losses at office and apartment buildings than analysts expected. Its provision for credit losses rose to $552 million, more than 10 times the consensus estimate.
The bank also cut its dividend by 71% to conserve capital. Companies are often reluctant to cut dividends because investors favor companies that make consistent payments.
The NYCB results sent shares of regional banks tumbling because that group plays a relatively large role in the country's commercial real estate market compared to megabanks, although it generally reserves less for potential defaults.
Shares of Valley National, another lender with a heavier weighting in commercial real estate, have fallen about 22% in the past week, for example.
The NYCB results “shifted investor sentiment toward the risk of an acceleration in non-performing loans and CRE credit losses over the course of 2024,” Morgan Stanley analyst Manan Gosalia wrote in a note Wednesday. investigation.
Despite a suddenly low valuation, “the perceived risk attached to all things commercial real estate will also weigh on investors' appetite to jump in,” Bank of America analyst Ebrahim Poonawala wrote Wednesday. He rates NYCB “neutral” and has a $5 price target.
Office buildings are at higher risk of default due to lower occupancy rates with the rise of hybrid and remote work models, and changes to New York's rent stabilization laws have caused some multifamily housing to fall into worth.
“People thought office space was where the stress was; now we're dealing with rent-controlled properties in New York City,” Emons said. “Who knows what will happen next.”
'Stressed' institutions
Emons noted that, just as during the March tumult, speculators have jumped into the trades, betting that NYCB stock would fall further.
In particular, put option activity that pays off if NYCB stock falls to $3 or less has increased, he said. A put option is a financial contract that gives the buyer the right to sell a stock at a predetermined price and within a specific time.
On Tuesday, Treasury Secretary Janet Yellen said she was “concerned” about losses in the commercial real estate sector, but that banking regulators were working to make sure the financial system adjusted.
“I think it's manageable, although there may be some institutions that are quite stressed by this issue,” Yellen said, declining to speak about any specific bank.
This agrees with the vision of Wells Fargo analysts that regulators are likely to take a more critical stance on reserves for potential credit losses after the NYCB blowout.
“A tighter look at credit will likely lead to more charge-offs, which may lead to more capital needs,” Wells Fargo analysts led by Mike Mayo wrote.
