The unexpected charge taken by New York Community Bancorp in its fourth-quarter earnings has triggered a dip in regional bank stocks, reflecting concerns about potential issues with loans made on commercial real estate. The decline in property prices over the past two years, coupled with rising interest rates, has made it challenging for banks’ clients to repay loans, raising concerns about the health of commercial real estate lending portfolios across the sector.
While the broader market reacted cautiously to NYCB’s woes, with modest declines seen in other regional bank stocks, NYCB itself experienced a significant 23% drop in its share price on Friday. This disparity suggests that investors are more wary than panicked about the possibility of similar challenges affecting other regional lenders.
The Federal Reserve’s decision to raise interest rates since March 2022 has gradually exacerbated issues with commercial property loans, creating a slow-burning problem for banks. A year ago, regional banks faced a different challenge when a sudden drop in the value of government bonds resulted in the collapse of several prominent institutions like Silicon Valley Bank, First Republic Bank, and Signature Bank.
The SPDR S&P Regional Banking ETF fell 1.3% on Friday, with individual regional banks experiencing varying degrees of decline. Valley National, Bank OZK, Citizens Financial Group, Zions Bancorp, and Regions Financial all saw their stock prices slip, albeit to differing extents.
Wedbush analyst David Chiaverini’s early recognition of NYCB’s problems led to a downgrade of the stock to a Sell rating last year. In a recent note, Chiaverini examined other banks’ exposures to rent-regulated borrowers in New York and highlighted significant disparities in loan book exposures.
Chiaverini’s analysis revealed that NYCB’s loan book is considerably more exposed to rent-regulated borrowers compared to other lenders. Specifically, 22% of NYCB’s total loans are attributed to buildings with at least one rent-regulated apartment, whereas Morristown, N.J.-based Valley National Bank has only 3.6% exposure to such properties. Furthermore, the proportion of loans to buildings with all tenants being rent-regulated is notably smaller, with NYCB at 6% and Valley National at just 0.8%.
According to Chiaverini, while NYCB’s problems are primarily idiosyncratic due to its significant exposure to rent-regulated multifamily loans, other banks may also face challenges, particularly in the current environment of elevated interest rates. Commercial real estate could pose a headwind to these banks as borrowers may encounter difficulties refinancing loans amid economic uncertainties and higher borrowing costs.
Treasury Secretary Janet Yellen has highlighted the concentration of commercial real estate lending among regional banks, expressing concern over rising vacancy rates in office properties in some cities. As chair of the Financial Stability Oversight Council, Yellen’s remarks underscore the importance of monitoring potential risks in the commercial real estate market to maintain financial stability.
In NYCB’s primary market of New York City, rent controls have constrained landlords from raising income levels as much as they might have desired to offset higher interest rates or address maintenance needs. Additionally, NYCB faced challenges related to raising its capital reserves due to new regulatory requirements triggered by its acquisition of assets from Signature Bank last year.
Following these developments, analysts at Deutsche Bank revised down their price target for NYCB from $7 to $5.
“While many of these issues are known and mostly manageable for the broader banking sector,” the regulatory challenges “are specific to NYCB, which shouldn’t be considered a read-through for the broader bank sector,” Deutsche Bank noted in their report.
Correction & Amplification: M&T Bank and BankUnited’s respective percentages of loans to buildings with any rent-regulated tenants are 0.9% and 0.5%. An earlier version of the chart in this article incorrectly stated these percentages as 9% and 5%, respectively.