Regional banks have been setting aside more capital to protect against future losses in commercial real estate, and some analysts worry it's not enough.
Shares of commercial real estate lender New York Community Bancorp (NYCB) fell 22% on Tuesday and are now down nearly 60% since the company stunned Wall Street last week by cutting its dividend and reporting a quarterly net loss of $252 million.
The turmoil surrounding the $116 billion bank is stoking new concerns about the industry's vulnerability to office buildings and apartment complexes that have suddenly seen their values plummet due to high interest rates and changing work patterns.
U.S. Treasury Secretary Janet Yellen said at a House Financial Services Committee hearing on Wednesday that she was “concerned” about the bank's exposure to commercial real estate.
Yellen said regulators were working closely with banks to ensure they were “building up loan loss reserves to cover losses” and that their “dividend policies are appropriate.”
“While this may cause significant stress for some institutions, I believe we can manage it,” Yellen added, repeating comments made by Fed Chairman Jerome Powell on Sunday.
Treasury Secretary Janet Yellen testifies in Washington on Tuesday. (Photo by Associated Press/Manuel Balce Senator) (Associated Press)
Analysts have argued that many other regional banks will need to set aside more money this year to absorb future losses from commercial real estate through additions to their balance sheets called “reserves.”
Banks typically add provisions and record them as an expense when they expect credit to worsen. The more provisions banks add, the lower their profits can be.
New York Community Bancorp Inc.'s fourth-quarter reserves were $552 million, up from $62 million a year earlier, which led to the quarterly loss.
“We believe the consensus for 2024 reserve expenses is too low for nearly all banks we cover,” Manan Gosalia, regional bank analyst at Morgan Stanley, said in a research note on Friday.
“I think we're going to see increased provisions across the industry,” David Chiaverini, regional bank analyst at Wedbush Securities, added in an interview with Yahoo Finance.
A New York Community Bank branch in Yonkers, New York. REUTERS/Mike Segar/File Photo (REUTERS/Reuters)
A concern among investors and analysts is whether regulators can force banks to make more of these reserves.
Bloomberg reported Monday that officials from the Office of the Comptroller of the Currency have pressured New York Community Bancorp to build up capital to prepare for bad commercial real estate loans and cut its dividend.
The Hicksville, New York-based bank has a high exposure to rent-controlled apartment complexes in New York City, where such buildings account for 22% of its loans.
The story continues
New York Community Bancorp said last week that its efforts to build up reserves were an adaptation to strict capital rules that apply to financial institutions with more than $100 billion in assets, a threshold it exceeded last year when it absorbed part of the failed Signature Bank.
Regulators are now “basically calling and asking, 'What does your commercial book look like?'” Chris Whalen of Whalen Global Advisors told Yahoo Finance.
Whalen added that regulators' concern is that banks could be “flamed” by investors if they have greater exposure to commercial real estate.
Acting Comptroller of the Currency Michael Su testifies before Congress last May. REUTERS/Evelyn Hockstein/File Photo (REUTERS/Reuters)
Shares of many other regional banks with heavy exposure to commercial real estate also fell last week, including New Jersey-based bank Valley National (VLY), whose shares were down more than 7% as of Tuesday afternoon.
“What really upsets us about New York Commercial Bank and other banks with commercial exposure is that they knew months ago that the OCC was preemptively requiring them to increase their capital and loan loss reserves,” Whalen said in a separate research note.
“Why? Because some of the commercial real estate valuations in this $20 trillion market are plummeting, and we expect a corresponding surge in defaults in 2024.”
“I would say the severity of this problem is primarily unique to New York Community Bank because its reserves are too small relative to the risks in its portfolio,” Chiaverini said.
But Chiaverini said there's still a “worst case scenario” that could cause problems for the industry as a whole: If inflation rises again, forcing the Fed to keep interest rates high for a long time and tipping the US economy into recession, borrowers could have a hard time paying back their loans.
Barring that, the pain in commercial real estate should be “manageable” for banks, he added.
David Hollerith is a senior reporter at Yahoo Finance covering banking, cryptocurrency and other areas of finance.
For in-depth analysis of the latest stock market news and events that are moving stock prices, click here.
Read the latest financial and business news from Yahoo Finance