Regional Banking Fears Resurface after NY Community Bancorp Slashed Dividend & Posted Rare Net Loss

Renewed Regional Banking Concerns

Last Wednesday, the New York Community Bancorp (NYCB) reported a rare net loss of $260 in the fourth quarter of 2023, due to "higher provision for credit losses". These provisions totaled $552 million, from just $62 million in Q3. The bank also announced a 71% cut to its dividend, in order to build up capital. It will now pay out just $0.05/share, from the $0.017/share it has been every quarter since 2016. Along with a 2% fall in deposits compared to the previous quarter, it was not a pretty picture. ^[1]

Markets reacted negatively to the results, and the stock (NYBC.us) plunged nearly 38% on the day, its worst on record. The report reignited fears around regional lenders, less than a year after the Silicon Valley Bank failure, causing a slump in the SPDR Regional Banking ETF (KRE.us).

The New York Community Bancorp was in the spotlight of that crisis, as it had assumed certain assets and liabilities of the Signature Bridge Bank ^[2], which had come under the control of Federal Deposit Insurance Corporation (FDIC) during the SVB-induced turmoil. The transaction raised the bank's assets above the $100 billion threshold that comes with increased regulatory requirements and made it one the 30 largest banks in the US, creating the need for higher capital reserves and stronger balance sheet.

The results came just before the US Fed removed from its policy statement the reference that the US banking system is "sound and resilient" and pushed back against aggressive market expectations for lower interest rates ^[3]. The central bank's massive amount of tightening that has brought the policy rate to 5.25% weighs on the property market. Another reason is the work-from-office trends following the pandemic. Office vacancies have been rising and stood at 13.5% YTD (through December 19), according to a recent report form Fitch, which expects them to increase further. ^[4]

Regional institutions are exposed to commercial real estate (CRE) and NYCB had more than $13 billion in such loans at the end of 2023, with investors fearing that some will not be paid. The higher provisions for credit losses were driven by charge-offs, partly tied to one office loan. Fitch estimates that commercial mortgage backed securities (CMBS) loan delinquencies will double from 2.25% in November 2023, to 4.5% in 2024 and 4.9% in 2025.

There are fears of a crash in the property market and the Fed's reserved stance around a monetary policy pivot aggravated those concerns, which spill to regional banks with commercial real estate exposure. However, the central bank has signaled it will dial back restraint later this year. Furthermore, the New York Community Bank is beefing up its reserves to withstand the challenging environment, while authorities had taken swift action last year to contain the SVB fallout.