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Mounting losses at U.S., Asian and European banks are rekindling concerns about the weakness of the U.S. commercial real estate market, which is under pressure from falling occupancy rates and rising interest rates.
U.S. regional lender New York Community Bancorp said on Wednesday it had suffered heavy losses on loans linked to commercial real estate, while Japan's Aosora Bank and Deutsche Bank warned on Thursday about risks from their exposure to U.S. real estate.
The losses mark the latest impact of twin problems in the U.S. commercial real estate market: fewer people working in offices and rising borrowing costs since the pandemic.
“We expect signs of distress to intensify this year as loan extensions expire,” said Kiran Raichura, real estate economist at Capital Economics. “Many borrowers will be forced to either inject fresh capital, return assets to lenders or sell in a soft market.”
New York Commercial Bank, whose shares soared last year when it bought Signature Bank, which failed at the peak of the U.S. regional lender crisis, said on Wednesday it had lost $185 million on just two real estate loans and set aside more than $500 million to cover potential loan losses.
The revelation shocked investors, causing NYCB's stock to fall nearly 40%, erasing the gains it had made since acquiring Signature. The pressure continued on Thursday, with the stock closing down another 11%.
NYCB's collapse also weighed on other regional bank stocks, as the sector has yet to fully recover from last year's collapse of Silicon Valley Bank and other mid-sized lenders.
Concerns about regional banks also drove a rally in U.S. Treasuries, a safe haven that benefits during market turmoil. The yield on the 10-year note fell to 3.82%, the lowest in a month, as traders worried about how the lending curbs would affect U.S. economic growth.
“Today's bond rally is definitely linked to concerns about regional banks,” said Thierry Wisman, financial markets economist at Macquarie.
Wisman also said the rise in bond prices could have to do with expectations of a Federal Reserve response. “When the Fed faces balance sheet problems at banks, they tend to create liquidity programs, and those programs tend to put bonds up for auction because they support the use of bonds as collateral for the Fed's credit,” he said.
Banking analysts said NYCB's poor performance was due to factors specific to the bank, particularly its increased scale after acquiring Signature, which led to improved regulatory oversight ratings, but warned it was still a reminder of concerns about real estate.
Bank of America analysts wrote in a note that the rising losses tied to commercial real estate office exposure “serves as a reminder of the ongoing credit normalization we are likely to witness going forward across the industry.”
The ripple effects were felt in Tokyo, where Aozora Bank's shares tumbled to their limit on Thursday after it forecast full-year losses on overseas real estate loans and warned that it could take up to two years for the U.S. office market to stabilise.
Aozora Bank, a mid-sized financial institution, cut its profit forecast for the fiscal year ending in March to a net loss of 28 billion yen ($164 million) from 24 billion yen. The cut in the profit forecast caused the bank's shares, which had been trading near a five-year high before the announcement, to fall more than 21 percent.
Meanwhile, Deutsche Bank also increased its provisions for losses on loans linked to U.S. commercial real estate to 123 million euros, from just 26 million euros a year earlier.
Real estate concerns are not limited to the U.S.: Switzerland's Julius Baer said on Thursday its profits fell by more than 50 percent after it wrote down 606 million Swiss francs ($700 million) on its exposure to embattled Austrian real estate group Signa, a loss so large it prompted CEO Philipp Rickenbacher to resign.
Additional reporting by Kate Duguid in New York
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