Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, USA, February 7, 2024.
Brendan Mcdermid | Reuters
Competitive Lender New York Community Bank has released a slew of financial metrics in the last 24 hours to reassure nervous investors.
But one of the most important resources for any bank seems to be in short supply for NYCB lately: trust.
The regional bank said late Tuesday that deposits were stable at $83 billion and that the company had sufficient resources to cover a possible flight of uninsured deposits. Hours later, it promoted Chairman Alessandro DiNello to a more hands-on management role.
The moves triggered a 6% rise in NYCB shares on Wednesday, a small reversal of the stock's more than 50% decline since the bank reported fourth-quarter results last week. On Thursday, shares of the Hicksville, New York-based lender continued their decline, 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 believe in this management.”
Amid the free fall, ratings agency Moody's cut the bank's credit rating two notches to “junk,” citing risk management challenges as the company searched for two key executives. Making matters worse, NYCB was hit with its first shareholder lawsuit on Wednesday amid its stock slump, alleging executives misled investors about the condition of its real estate holdings.
The sudden decline of NYCB, previously considered one of last year's winners after acquiring Signature Bank's assets, renewed fears about the state of mid-sized American banks. Investors worry that losses on some of the $2.7 trillion in commercial real estate loans held by banks could trigger another round of turmoil after a flood of deposits hit Silicon Valley Bank and Signature last March.
Property
Last week, NYCB said it was forced to stockpile far more cash for office and residential losses than analysts had expected. Provisions for loan losses rose to $552 million, more than 10 times the consensus estimate.
The bank also cut its dividend by 71% to conserve capital. Companies are typically reluctant to cut dividends because investors prefer companies that pay steady distributions.
The NYCB results sent shares of regional banks plummeting because that group plays a relatively large role in the country's commercial real estate market compared to the megabanks and generally reserves less for possible defaults.
For example, shares of Valley National, another lender with a larger emphasis on commercial real estate, have fallen about 22% in the past week.
NYCB's findings “shifted investor sentiment back toward the risk of an acceleration in non-performing loans and CRE loan losses over the course of 2024,” Morgan Stanley analyst Manan Gosalia wrote in a research note on Wednesday.
Despite a suddenly low valuation, “the perceived risk associated with commercial real estate is also likely to impact investors' willingness to intervene,” Ebrahim Poonawala, an analyst at Bank of America, wrote on Wednesday. He rates NYCB “neutral” and has a price target of $5.
Office buildings are at higher risk of failure due to lower occupancy due to the rise of remote and hybrid work models, and changes in New York's rent stabilization laws have resulted in a decline in the value of some multifamily properties.
“People thought the stress was on office space; now we’re dealing with rent-controlled properties in New York City,” Emons said. “Who knows what will happen next.”
Institutions “stressed”
Emons noted that, similar to the March turmoil, speculators have been betting that NYCB shares would continue to fall.
In particular, there has been a sharp increase in activity in put options, which pay out if NYCB stock falls to $3 or less, he said. A put is a financial contract that gives the buyer the right to sell a stock at a predetermined price and within a specific time.
On Tuesday, Treasury Secretary Janet Yellen said she was “concerned” about losses in commercial real estate but that banking regulators were working to ensure the financial system adjusted.
“I think it's manageable, although there may be some institutions that are quite stressed by this issue,” Yellen said, declining to discuss a specific bank.
This is consistent with the view Wells Fargo Analysts say regulators are likely to take a more critical stance on provisioning for potential loan losses following the NYCB flare-up.
“A stricter view of creditworthiness is likely to result in more write-downs, which may lead to higher capital requirements,” Wells Fargo analysts led by Mike Mayo wrote.