Shares of New York Community Bancorp have fallen more than 40% since Tuesday. This drop is following an announcement that the bank is facing losses from commercial real estate loans. Could this be a trend for regional banks?
Wedbush Managing Director David Chiaverini joins Yahoo Finance Live to weigh in on this challenge for the bank and what to expect in the coming months.
“I do expect this to be contained mostly to New York Community,” notes Chiaverini. Chiaverini states that the commercial real estate market is distinct in many ways, including the window of loan maturity, “the maturity schedule for these loans is drawn out,” which ideally should allow most banks to manage accordingly.
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
Editor's note: This article was written by Eyek Ntekim
Video Transcript
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JARED BLIKRE: Shares of New York Community Bancorp tanking over the last couple of days after the bank said it's dealing with losses from commercial real estate loans. This following a similar crisis with regional banks like Silicon Valley Bank last year. And for more insight on this and to see if this is a continuing trend for the regional banks, we're talking to Wedbush Securities managing director of equity research David Chiaverini.
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David, thank you for joining us here today. What is the scope of this problem? I think when we see things like this, not a huge bank, but people are always wondering what the knock on effects are and what's hidden underneath the surface?
DAVID CHIAVERINI: Yeah, so I would say this is idiosyncratic to New York Community Bank. And the reason for that is at least what I see as the problem areas for New York Community is their office portfolio is 4% of loans. But another troubled area, at least in our view, is rent-regulated multifamily. And those loans make up 22% of New York community's loan portfolio, whereas most of the rest of the regional banks don't have anywhere close to that level of rent-regulated multifamily exposure. So I do expect this to stay mostly contained to New York Community.
Now, as we progress through 2024, it's not to say that the banking industry won't have issues to contend with. Commercial real estate will be an issue. But I think it will be managed better at some of the other banks versus New York Community with these problem areas.
JULIE HYMAN: David, and I do want to talk more broadly about the sector, but I do have another question about New York Community, specifically, I mean the thing that really seemed to take investors off guard was by how much it increased its reserves. But as you point out in your note reacting to it, its reserve-to-loan ratio is still below peers. So do you think that they should even have set aside more in reserves?
DAVID CHIAVERINI: Yeah, I do think they should have set aside more in reserves. Because last year, they did have the fortunate position of having a $2 billion bargain purchase gain when they acquired the Signature Bank portfolio and the deposits from the FDIC. They should have-- and hindsight being 2020-- should have built reserves to offset a portion of that gain right in the second quarter.
But what they did in increasing their reserves-- so from a whole holistic standpoint, the reserve to loan ratio went to 1.17. The group is more like 1.4 to 1.5, so they're shy there. But the other area drilling in on multifamily, they took the reserve from 40 basis points to 80 basis points. But based on our calculations, they should have taken it up to 2.4%. So we do think that they're under reserved related to the rent-regulated multifamily portfolio.
JARED BLIKRE: And David, could you talk to us big picture about specifically how the commercial real estate market is different from, say, the mortgage-backed security market that we see for private housing? And they develop on-- the problems develop on very different timelines, lots of different factors involved. With commercial, you have these leases that are 10 years. But can you kind of give us an appreciation for how long it takes for these problems to surface?
DAVID CHIAVERINI: Yeah, you hit the nail on the head. The maturity schedule for these loans is drawn out. It's not like they're all going to mature over the next 6 months or 12 months. It's more we're talking in terms of multiple years. So that's what should enable the banks to manage the issue.
Will it be a headwind? Yes. Will they have to increase provisions over the next few years? Yes, but it should be manageable.
Now, could we see some banks stumble on it? Yes, we think New York Community is one of them. But we think it should be manageable for the most part because of, as you noted, it being spread out over time as opposed to very much in the near term.
And on mortgage-backed securities, that's more of an interest rate risk issue given that most mortgages, of course, are fixed-rate loans and that gets reflected in the pricing of those bonds that are trading still underwater from where they were a couple of years ago,
JULIE HYMAN: Is there any scenario that would be sort of a perfect storm for some of these portfolios? I mean, would it have to do with rates going up abruptly, for example, or no, because most of these, the maturities are gradual of these particular loans. Is there anything else that you're worried about, I guess, is what I'm asking, David?
DAVID CHIAVERINI: Yeah, well, the perfect storm would be inflation not getting to the Fed's 2% target, so the Fed stays higher for longer. And then the other part of that perfect storm scenario is going into a recession. So if we have a situation where the economy is slowing and rates are staying higher for longer because of higher inflation being sticky, that would make it very difficult for these borrowers to be able to withstand the higher rates when their loans come up for renewal. So it's really repricing risk that is one of the main risks with commercial real estate
JULIE HYMAN: David, always really appreciate your perspective on these issues. Thanks so much.