“Bad” doesn’t adequately express the last few days for New York Community Bancorp.
As the close of Thursday, shares were down 44.6% after the bank revealed a 2023 Q4 loss of $252 million rather than the Q3 $207 million gain. Markets remembered that there are still significant concerns about commercial real estate and its loans.
New York Community had acquired much of the deposits and loan assets from failed Signature Bank, and it added a $552 million provision for future credit losses, plus $185 million in net charge-offs, plus cut dividends by 70% to bolster capital.
Despite repeated assurances from the Federal Reserve and the Treasury department that banks are fundamentally sound, real-time results for banks have become reminders to markets that all is apparently not well.
The problems facing New York Community were more than Signature. A New York co-op loan that wasn’t in default nevertheless is now up from sale because of “a unique feature that pre-funded capital expenditures.” There was also an “additional charge-off on an office loan that went non-accrual during the third quarter, based on an updated valuation.”
Even worse, all this was unanticipated by investors because the bank had not prepared markets for the bad news.
From a market view, compounding all this was that the acquisitions from Signature and 2022’s acquisition of Flagstar Bancorp boosted New York Community’s total assets to more than $100 billion. That put the institution, as it noted, “firmly in the Category IV large bank class of banks between $100 billion and $250 billion in assets and subjecting us to enhanced prudential standards, including risk-based and leverage capital requirements, liquidity standards, requirements for overall risk management and stress testing.”
Moody’s placed the bank on review for a downgrade
But there was compounding news from elsewhere in the world, as the Wall Street Journal reminded. Azora Bank of Japan saw shares drop 20%, “the maximum allowed on a single day under stock-market rules, after it said losses in its U.S. office-loan portfolio will likely lead to a net loss for the year ending in March.” The annual loss will be the first in 15 years and its president will step down April 1. And then, Deutsche Bank “increased loss provisions in its U.S. commercial loan book nearly fivefold from 2022’s fourth quarter to 123 million euros, equivalent to $133 million.”
Concerns about conditions in CRE might push banks into restricting lending even more, which would reduce available financing and make the industry more dependent on alternative funding sources, like private equity, with significant higher financing costs than commercial banks.
Or as Morgan Stanley’s Mike Wilson put it to Bloomberg: “It’s not a systemic issue. It’s a weight on credit growth [and] the companies that are reliant on that kind of funding are going to see that’s a paperweight for them.”