Traders work on the floor of the New York Stock Exchange (NYSE) in New York, USA, February 7, 2024.
Brendan McDiarmid | Reuters
Lender on alert New York Community Bank revealed litany financial results for the last 24 hours in an attempt to reassure skittish investors.
But lately, NYCB seems to be lacking one of the most important resources for any bank: trust.
Regional Bank late Tuesday evening said that deposits are stable at $83 billion and that the firm has sufficient resources to cover any possible run on uninsured deposits. In a few hours this advanced Chairman of the Board Alessandro DiNello to a more hands-on role in management.
The moves sent NYCB shares up 6% on Wednesday, making a small dent in the stock’s more than 50% decline since the bank reported fourth-quarter results last week. Shares of the Hicksville, N.Y.-based lender resumed their slide Thursday, falling more than 6%.
“There is a crisis of confidence here,” said Ben Emons, Head of Fixed Income at NewEdge Wealth. “The market doesn’t have faith in this management.”
In free fall, ratings agency Moody’s downgraded the bank’s credit ratings two notches to junk, citing risk management issues while the firm searches for a pair of key executives. To make matters worse, NYCB suffered from the first shareholder lawsuit on Wednesday over the stock’s collapse, alleging that executives misled investors about the health of their real estate holdings.
The sudden drop in shares of NYCB, previously seen as one of last year’s winners following its acquisition of Signature Bank, has reignited concerns about the health of midsize U.S. banks. Investors are worried that losses on some of the banks’ $2.7 trillion in commercial real estate loans could spark a new round of turmoil after a deposit run engulfed Silicon Valley Bank and Signature last March.
Real estate
Last week, NYCB said it had been forced to accumulate far more cash to cover losses at offices and apartment buildings than analysts had expected. The provision for credit losses rose to $552 million, more than 10 times the consensus forecast.
The bank also cut its dividend by 71% to preserve capital. Companies are generally reluctant to cut dividends because investors prefer firms that pay stable dividends.
NYCB’s results sent shares of regional banks tumbling, as the group plays a relatively larger role in the country’s commercial real estate market compared to megabanks, although it generally reserves smaller amounts against potential defaults.
For example, shares of Valley National, another lender with a larger exposure to commercial real estate, are down about 22% over the past week.
NYCB’s results “shifted investor sentiment back toward the risk of accelerating CRE non-performing loan growth and loan losses through 2024,” Morgan Stanley analyst Manan Gosalia wrote in a research note Wednesday.
Despite the suddenly low valuation, “the perceived risk associated with all things commercial real estate will also likely weigh on investors’ willingness to get involved,” Bank of America analyst Ebrahim Poonawala wrote Wednesday. He rates NYCB “neutral” and sets a $5 price target.
Office buildings are at greater risk of default due to lower occupancy due to the rise of remote and hybrid work models, and changes to New York’s rent stabilization laws have led some apartment buildings to become dive in price.
“People thought stress was office space; now we’re dealing with rent-controlled properties in New York City,” Emons said. “Who knows what will happen next.”
Institutions under stress
Emons noted that, as during the March unrest, speculators entered the trades, betting that NYCB shares would decline further.
In particular, he said there has been increased activity in put options, which pay off if NYCB shares fall to $3 or below. A put is a financial contract that gives the buyer the right to sell a stock at a predetermined price and within a specified time.
Treasury Secretary Janet Yellen said Tuesday she was “concerned” about losses in commercial real estate, but banking regulators were working to ensure the financial system would adjust.
“I think it can be managed, although there may be some institutions that are under significant stress because of this issue,” Yellen said, declining to talk about any specific bank.
This is consistent with the opinion about Wells Fargo Co. Analysts believe regulators are likely to take a more critical stance on loan loss provisioning as the NYCB situation worsens.
“A tighter view of credit will likely lead to more write-offs, which could lead to higher capital requirements,” wrote Wells Fargo analysts led by Mike Mayo.