Panic escalates! New York Community Bank plunges 40% in two days, will the crisi

Following the downgrade of credit ratings by Fitch and Moody's, investor sentiment towards New York Community Bank has continued to sour, with shares plunging more than 20% for the second consecutive trading day on Monday, reaching a new low not seen since the 1990s.

The bank had previously stated that it had identified "material weaknesses" in its internal controls related to loan review and revised its fourth-quarter loss to $2.8 billion. As the regional banking sector initiates a new round of declines, the risk of contagion from commercial real estate valuation risks has once again caught the attention of investors and U.S. officials.

The escalation of losses has shocked the market, sparking concerns about the risk of contagion. After the Federal Reserve raised interest rates over the past two years, other banks may also be struggling with real estate loans.

The KBW Regional Banking Index has fallen 11.1% year-to-date. Data from analytics firm Ortex shows that as of last Friday, short sellers targeting the regional bank ETF had paper profits of $977 million, with New York Community Bank alone contributing $145 million.

After its January financial report was unexpectedly torpedoed by a commercial real estate asset, New York Community Bank announced an immediate reorganization of its leadership, including the appointment of a new CEO.

Advertisement

However, the turmoil is far from over. The regional bank, headquartered in Long Island, New York, issued another statement last Thursday, stating that it had identified substantial deficiencies related to loan review in its assessment of internal financial controls. The bank stated that these deficiencies were the result of "inadequate oversight, risk assessment, and monitoring activities."

The two major rating agencies, Fitch and Moody's, subsequently announced a downgrade. Fitch said that the deficiencies identified by New York Community Bank prompted the bank to reconsider its controls over the adequacy of provisions, especially in concentrated investments in commercial real estate.

Moody's stated that further information disclosed indicates that the bank is undergoing significant changes in governance, oversight, risk management, and internal controls in a "particularly challenging" operating environment, including risks in its loan portfolio. The report mentioned that about 54% of the bank's office loans are located in Manhattan, where the current vacancy rate is about 15%, leading to an expected increase in the risk weight of non-performing office loans from 100% to 150%.

Now, investors have pushed back the timeline for the Federal Reserve's interest rate cut from March to June, and the space for rate cuts has also fallen by nearly half since the beginning of the year. As a result, the risk of defaults in commercial real estate such as office buildings and multi-family residences has escalated. Matt Reidy, head of Moody's commercial real estate economic analysis, stated that office building valuations have dropped by nearly 25% to 30% from their peak in 2019.Many institutions predict that some regional banks may be forced to sell loans at a loss or increase loan loss reserves. Citigroup analyst Keith Horowitz said, "We anticipate whether New York Commercial Bank will sell assets, but due to uncertainty, even if the price is very reasonable, we may also find it difficult to see many potential buyers."

Commercial real estate risks still exist

Apollo Asset research shows that in the investment portfolios of regional banks, the proportion of outstanding commercial real estate loans accounts for nearly 70% of the total market size.

Fitch had previously warned that due to many companies struggling to encourage remote employees to return to the office, the delinquency rate of Commercial Mortgage-Backed Securities (CMBS) is expected to rise to 8.1% in 2024. At the same time, the delinquency rate of CMBS loans for commercial multi-family residential properties (properties with more than five units) is expected to reach 1.3% in 2024, compared to only 0.62% in 2023.

Investors are paying attention to financial institutions with a high proportion of commercial real estate in risk-based capital. According to the guidance requirements of the Federal Deposit Insurance Corporation (FDIC), a level of 300% may indicate that lenders face significant risks of concentrated asset risk exposure. Statistics from Trepp, a real estate data provider, show that the data for many banks have exceeded 400%, with New York Community Bank at 468%, OceanFirst Bank at 447%, and Valley Bank even reaching 479%.

Fitch said in its report that the proportion of CRE loans outstanding for nearly 1900 banks with assets below 100 billion US dollars exceeds 300%. If asset prices fall by an average of about 40%, the loss of the portfolio may lead to the collapse of a few small banks.

Hu Gang, managing partner of New York hedge fund Winshore Capital Partners, said in an interview with Yicai journalists that, from the current point of view, the problems of New York Community Bank have their own uniqueness, affected by factors including mergers and acquisitions, balance sheet structure, etc., and whether it will affect more institutions in the future is still to be observed.

The US government and the Federal Reserve are also closely monitoring the problems of New York Community Bank. Michael Barr, the vice chairman of the Federal Reserve responsible for bank supervision, said last month that US regulatory agencies are "closely monitoring" the risks of commercial real estate loans. He said that regulatory agencies are paying attention to what measures banks have taken to mitigate potential losses, how to report risks to the board of directors and senior management, and whether they have enough reserves and capital to cope with commercial real estate loan losses.

The International Monetary Fund (IMF) recently warned that US commercial real estate prices are experiencing the most severe collapse in half a century. Hu Gang told Yicai that with the experience of the bankruptcy of several financial institutions, including Silicon Valley Bank, last year, regulatory agencies will be more prepared for risks. However, the Federal Reserve's monetary policy is still a source of uncertainty, and the asset pricing risks caused by the continued restrictive interest rate level cannot be ignored.