The Fed could’ve done without a flare-up in the heretofore dormant regional banking crisis ahead of Jerome Powell’s press conference on Wednesday, when a record one-day decline in shares of New York Community Bancorp conjured uncomfortable memories of last year’s turmoil among America’s small- and mid-sized lenders.
The stock’s rather remarkable collapse rekindled rate-cut bets for the March FOMC meeting. Following Tuesday’s JOLTS release in the US, the market-implied odds of a move from the Fed in March were trimmed to just ~35%. That probability roughly doubled on Wednesday.
There’s quite a bit going on at NYCB, and some of it isn’t good, notwithstanding an admirable attempt at damage control via the liberal deployment of euphemisms in the slide deck.
It’s hard to say what the market hated most on Wednesday, but the combination of a dividend cut and an unexpected loss prompted a veritable wipeout, with sentiment undercut further by the notion that NYCB’s results might’ve been a CRE canary.
You need context. Lots of it. NYCB, you might recall, acquired $25 billion in cash and $13 billion in loans from Signature when it failed last year. After “catapulting,” as the bank put it, over $100 billion in assets, NYCB is now in a new regulatory bucket. That means more onerous capital requirements.
In preparation for that, the bank “performed [a] focused review” of its loan portfolio, re-rated some loans “proactively” and in a manner that “reflect[s]” a “conservative approach to managing credit quality.” NYCB also increased its provision for credit losses.
See that number in the red box? That’s $552 million. The Street expected less than $50 million. So, the provision was eleven times higher than analysts anticipated. (“These go to eleven!”) If you follow it down to the net income line, you find a loss of $252 million. That was supposed to be a $205 million profit, where “supposed to” means that’s what analysts had penciled in.
Something’s amiss in all that. There’s a yawning disparity between what analysts thought about asset quality (and those perceptions were presumably formed based on management commentary) and what the bank now thinks is consistent with prudence in light of its new regulatory reality, the macro environment, market conditions and so on.
Mike Mayo, who knows about banks, called the results “a reminder that office and CRE issues remain front-and-center not only on the minds of investors, but also the banks themselves.”
That’s not what you want to hear. The CRE apocalypse narrative is the dog that didn’t bite — another campfire ghost story bears told to justify perpetually gloomy outlook pieces. Or maybe not. Maybe the reckoning is upon us.
NYCB, while discussing its reserve build, described risks to multi-family loans and “deterioration in office.” The figure on the right, below, shows the $373 million build:
Again, the “primary driver” was office weakness and re-pricing risk in multi-family.
The office weakness isn’t likely to abate anytime soon. Americans are reluctant to return to work, preferring instead to “work” (with scare quotes) from their home “offices” (which is to say their living rooms). It seems unlikely that demand for office space will ever return to pre-COVID levels.
It’s possible, then, that NYCB is a prelude to the kind of office drama that some observers have warned about for the better part of two years. At the least, the bank’s report suggested all’s not well in the property sector, and that makes NYCB a macro story.
Coming full circle, this is all unwelcome for the Fed and for Powell, who surely doesn’t want to answer a bunch of questions about regional banks, or field inquires about the extent to which a bad day for one lender does or doesn’t increase the odds of an early start to rate cuts.
On the bright side, NYCB said Wednesday that the Flagstar integration has hit “every milestone along the way.” “Systems conversion [is] on track for mid-February,” the bank noted, chipper, adding that NYCB’s all set to launch a “fresh, new re-branding campaign.”
Thanks. That piece was worth the price of admission
Thanks for posting this. I’m not surprised since we were told on the QT about some huge markdowns of private real estate investments going on. All due to offices.
The move from scarcity to surplus in the multiunit space is pretty remarkable as well.
This is the slowly burning fuse to Wile E Coyote’s TnT. Stories proliferated on the topic last year then… crickets. This is a train wreck in slow motion. Time horizon and size of the problem are opaque, but it will only take 1 or 2 banks failing to clarify whether or not the fuse is still lit… BOOM!
Yikes. I bought NYCB right after the SIVB-triggered meltdown, got lucky when it took SBNY’s carcass, and took the quick gain, thinking the easy money was made. Then watched it go up up up, kicking myself for the premature exit. Sure it had more office exposure than I’d otherwise consider owning in a bank name, but surely management kitchen-sinked the provisions on the acquired assets, the better to boost earnings with later reversals? Oops, apparently not.
A bit of contagion over in Tokyo last night.
So many “analysts” gave the regional banks the all-clear designation when the crisis at SVB failed to trigger any more headlines in the next quarter.
NYCB multifamily loans include a lot of rent-controlled NYC apartments, which is an idiosyncratic risk.
yep. But the surplus I’m referring to is in the sun belt.
I think Sun Belt over-supply will fade in 2025, since new multifamily permits and AIA residential billings slumped so much in 2023.
https://fred.stlouisfed.org/graph/?g=1f8t7
https://www.aia.org/sites/default/files/2023-12/december-abi-infographic-part1.pdf
Could be. I was surprised by it. Though the WSJ recently had a piece about a surplus of single family homes in Texas.
The Sunbelt apartment REITs have been trending down for a year or more, due to rising rates and new supply growth slowing rent growth. With rates now declining and new supply decline a year away, they are bottoming. They should be able to pick up newly completed projects this year from developers unable to get permanent financing to replace their construction loans, so seems like 2025 should be a good year for the companies, suggesting 2024 should see the stocks come good.
Oversupply of SFR, that’s a new one for me – I’ll go find that article.
This NYT article outlines the unique issues facing NYC rent controlled apartment buildings.
https://www.bloomberg.com/news/features/2024-02-05/nyc-apartments-go-on-sale-for-50-off-due-to-tougher-rent-control?srnd=premium&sref=eCUg41rA
This is really interesting to me. I’m on some editorial boards of academic journals and I just reviewed a new case study about the passing of SBNY. Sadly, the case wasn’t very good. The author linked SB’s failure to that of SVB. They were clearly unrelated. The author then posited that the bank should have solved its “problem” by getting regulators to change. The author was not clear why that was an issue but thanks to this posting and comment thread I understand the issue. SB’s acquisition pushed NYCB entry into a bigger size category, raising its capital burden. Why didn’t NYCB see that coming when they looked at SB’s portfolio and adjust for it in advance? That seems like a very silly oversight. Analysts didn’t seem to catch that little nuance ahead of time, either. Tsk, tsk.