Bank of America Senior North American Banks Analyst Ebrahim Poonawala joins Yahoo Finance to discuss the outlook for the commercial real estate and banking sectors on the Federal Reserve's interest rate strategy.
"The Fed been hiking and tightening monetary policy with the goal of cooling things off. When you think about banks... there are two ways that impacts banks," Poonawala says. "One is growth slowing down, and you're seeing that in lending growth that has slowed down quarter over quarter over the last several quarters, I would say. And the second impact is, as rates go up, does it start having an impact on credit quality?"
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RACHELLE AKUFFO: Well, Fed vice chair for Supervision Michael Barr names commercial real estate loans a big risk for regulators. He says, quote, "the reduced demand for office space and higher interest rates have put pressure on some CRE valuations, particularly in the office sector." Supervisors have been closely focused on banks CRE lending. Now bank stocks have been in focus for investors since New York Community Bancorp posted large losses over the course of the month warning of more pressure to come.
So joining us to discuss the fallout for banks in this environment is Ebrahim Poonawala, Bank of America Senior North American Banks. Analyst Ebrahim, it's great to have you on. Talk to me about your reaction to these comments from Barr. I mean, we know that commercial real estate has been the zombie in the room. Did any of this surprise you?
EBRAHIM POONAWALA: No. So thank you so much for having me. And none of this is surprising. We've been talking about commercial real estate being a pressure point for the industry, I would say, for the better part of the last two years. And I think as you called it out, where we are seeing stress for the last year and all the banks that we cover have been building reserves against future losses primarily in terms of the pressure that we are seeing in the office market.
RACHELLE AKUFFO: And so Ebrahim, what are the other stickier parts? I know there's a lot of focus on office when it comes to commercial real estate. What are of the other sectors that are also under pressure?
EBRAHIM POONAWALA: So the other-- so it's a bit more nuanced. Once you move from office to any of the other CI subsectors and multifamily apartments is something that's getting a lot of headlines. But remember what we see in office is a structural shift. There are buildings which are old dated and empty. And no one's going to reoccupy them. Absent tons of new CapEx that goes into these buildings.
If you look at multifamily that I just mentioned could be a bit of a pressure point over the next year or two is tied to the fact that we did see some overbuilding maybe or a lot of supply coming through in some of the Sun Belt markets over the next few years. That could pressure some of the new construction that's coming on in terms of the rents, et cetera. So what does that mean? Like you could see some more restructuring situations and you might see some more projects that get halted and such.
So yeah, they could add to losses. But again, the loss content on cash flow in commercial real estate if there's an apartment building that's 100% occupied, that's still cash flowing. So I think that's where the difference is in terms of the loss that banks may experience on office versus multifamily.
RACHELLE AKUFFO: Ebrahim, I want to talk about some data that we have from the New York Fed this morning showing that consumer borrowing costs rose 24 bips last quarter and nearly 100 bips in the last year to 9 point, almost 4%. That's the highest level since Q4 of the year 2000. I'm curious, to what extent does that read into some of the bank names that you cover?
EBRAHIM POONAWALA: So you're right. Again, this was the intention of the Fed. The Fed has been hiking and tighten monetary policy with the goal of cooling things off. When you think about banks and we've done some analysis and published on this in the past is losses for banks. So there are two ways it impacts banks. One is growth slowing down. And you're seeing that in lending growth that has slowed down quarter over quarter over the last several quarters, I would say.
And the second impact is, as rates go up, does it start having an impact on credit quality? And the higher correlation there is going to come down to what happens to the unemployment market. I think your previous guest talked about it, the job market remains extremely strong. A lot stronger than anyone of us imagined a year ago or two years ago. But that would be the driver of losses for the banks. But absent that, all you're going to see is a continued slowdown, less activity.
So less fee revenue, less loan growth for banks.
RACHELLE AKUFFO: And I have to get your top stock picks when it comes to not just regional banks obviously. Still trying to find their footing here, but also the bigger banks as well.
EBRAHIM POONAWALA: So yeah. So I mean, in terms of the bigger banks, I mean a couple of names that we've liked on the banking side are a name like Citigroup where management is doing a lot of heavy lifting, cleaning up probably 20 years of mismanagement to get this bank on better footing. The other name that we've liked and you saw some good news on them yesterday was Wells Fargo where it's a high quality deposit franchise stuck with a lot of regulatory issues tied to their retail sales scandal going dating back to 2016.
And you got an update yesterday with the removal of the consent order suggesting that they are making some progress there. So those are a couple of big banks that we like. And among the regionals, there are a few institutions if you look at a name like Fifth Third Bank, FRTB or M&T bank, MTB, or institutions where they have ample liquidity, they're stress tested by their regulators sound solid management teams.
RACHELLE AKUFFO: Certainly continue to look into those and a lot of the nuances as you've been tracking as well. Appreciate you joining us. Ebrahim Poonawala, Bank of America senior North American banks analyst. Thank you so much. Have a great weekend.