Missing Signature, Bouncy Markets!
While everyone is focused on Mag7 on Powell, NYCB (New York Community Bancorp) announced a $260M loss in Q4, and the stock declined to 25 years low.
The dividend was cut to bolster its capital as NYCB prepares to deal with potentially stricter regulation for banks with more than $100 billion of assets.
Some of NYBC’s problems are of its own making, while others reflect its absorption of Signature. Media abuzz with headlines that issues with Bancorp are “isolated” with “no read-through to other names.” as Regulatory rules for crossing $100 billion in assets are “considerably more punitive”.
However, there is a consensus that warnings of the type heard from NYCB may show the pain at the industry level - the old saying is very much appropriate: if you see one, there must be more hiding just out of sight.
Important difference between last year’s crisis and what is befalling NYCB is that bank’s deposits appear to be relatively stable - deposits slipped only marginally by 2 % in Q4 to $81.4 billion.
Key take aways:
1. Regional banks tend to do far more real estate lending than the big money centre banks and are much more exposed to losses there.
It’s common knowledge that Commercial real estate market has been in turmoil since the onset of the pandemic. (NYCB which has the largest CRE exposure among the regional banks- delivered a reminder that banks are just beginning to see the pain)
Numbers:
1. Loan portfolio:
• Total loans held for investment ("LHFI") increased $624 million or 1% to $84.6 billion on Dec 31, 2023, compared to Sep 30, 2023, driven by growth in commercial loan portfolio.
• Commercial and industrial loans ("C&I") totalled $25.3 billion at Dec 31, 2023, up $831 million or 3% compared to Sep 30, 2023
• Commercial loans represent 46% of total loans compared to 45% at Sep 30, 2023 and 33% at Dec 31, 2022.
2. HTM portfolio :
Hold To Maturity" accounting can now more appropriately called as "Hide till Maturity".
Dump any asset with a market value implying a steep loss in the HTM books, and the loss has "disappeared" However, this trick has two significant weaknesses:
• If you are forced to sell the underwater assets in HTM books before maturity, then the loss turns from "paper" into "real".
• If the asset matures, hence ceases to be eligible for HTM accounting, and the principal isn't repaid in full, then the paper loss becomes a real one again.
3. All mergers and acquisitions in financial industry entail a cost whether you are merging with your 'parent' or taking over an 'outsider'.
In 2023, the FED took care of the first weakness with the BTFP that effectively allowed banks in liquidity crisis to borrow against the nominal value of their US Treasuries rather than the market value dodging a forced selling that would have likely triggered a domino of regional bank bankruptcies.
The second weakness not only is about to become a major issue but is also a problem that the FED and other Central Banks cannot solve -there are reports that this second weakness is what NYCB has faced now.
In this regard, U.S. Banks are facing unrealized losses of roughly $685 billion (updated as of Q3). With those losses, banks are not able to afford paying higher deposit rates.
When Treasury yield in money market at 5.33%, the average US bank deposit rates are at 0.64%. It is unfathomable to think that a Fed rate cut of 25 bp would solve this issue. Markets seem to think that bad news is good, but bad news is obviously bad.
Concluding, this may not set off another regional banking crisis of March 2023 - but it brings CRE exposure and HTM portfolio size into Focus. In the lighter vein, no bank will ever put its "signature" howsoever tempting it is.