Just as people believed that the 2023 banking industry turmoil in the United States had passed, a new round of banking "explosion" risks has once again caused tension among multiple parties.
On March 1st, the stock price of New York Community Bank (NYCB) in the United States fell by more than 25%, reaching a new closing low since 1997. Several rating agencies have downgraded the bank's rating. As a result, the stock prices of other regional banks have also declined.
In fact, the stock price of New York Community Bank has been continuously declining for over a month. The explosion occurred on January 31st when New York Community Bank released its fourth quarter financial report, showing a loss of $252 million in the fourth quarter of 2023 and a profit of $172 million in the fourth quarter of 2022. On that day, the bank's stock price plummeted by 38%, dragging down the Dow Jones Regional Banking Index (KBW) by 6%, marking the largest daily decline since March 13, 2023, further triggering a safe haven sentiment across the market.
The house leaks, but it rains continuously at night. On February 6th, international rating agency Moody's Investor Services downgraded the credit rating of New York Community Bank by two levels to "junk". On that day, the stock price of New York Community Bank fell another 22%.
The official website of New York Community Bank shows that New York Community Bank is the parent company of Flag Star Bank, one of the largest regional banks in the United States. As of December 31, 2023, the total assets of the company were $116.3 billion, the total loans were $85.8 billion, the total deposits were $81.4 billion, and the total shareholder equity was $10.8 billion.
With the sluggish market sentiment and more problems exposed by New York Community Bank, many people have become nervous. Will New York Community Bank become the next "Silicon Valley Bank"?
Before answering this question, we must see that the "culprit" behind the "explosion" of New York Bank is real estate loans.
The main risk of New York Community Bank lies in holding a significant amount of commercial real estate loans. According to the Q4 2023 financial report, New York Community Bank holds over $50 billion in commercial real estate loans, accounting for 43% of total assets. According to Federal Reserve data, as of December 2023, commercial real estate loans accounted for only about 6.5% of the total assets of large banks, while they accounted for 30% of the total assets of small banks.
However, in the past one or two years, there have been frequent defaults on real estate loans. Due to high interest rates and a sluggish commercial real estate leasing market, many homeowners can only default, and banks have to accept the harsh reality of increased losses from commercial loans. One of the main reasons for the losses of New York Community Bank in the fourth quarter of last year was that two loans related to commercial real estate turned bad, resulting in losses of up to $185 million.
For a relatively small bank like New York Community Bank, the real estate loan business has taken up the majority of the bank's business, and default has dealt a heavy blow to the bank.
In addition, the effect of the Federal Reserve's aggressive interest rate hike cycle is beginning to show, and commercial banks have fully felt the torment of high interest rates. Fortunately, New York Community Bank holds fewer bond assets, so the floating losses on bond investments should not be too significant.
However, compared to Silicon Valley Bank, which went bankrupt last year, the spillover effects generated by New York Community Bank are not significant and have not yet spread.
Mainly because, firstly, the Office CRE loan is relatively high-risk for real estate loans, and the size of the New York Community Bank part is relatively controllable, about 3.4 billion US dollars.
Secondly, compared to Silicon Valley Bank, which went bankrupt last year, New York Community Bank has a better liquidity situation. As of the end of 2023, the total deposit size of New York Community Bank was $81.4 billion, with cash on hand reaching $11.5 billion, while the total deposit and cash at the time of Silicon Valley Bank's bankruptcy were approximately $173.1 billion and $13.4 billion, respectively. The deposit to cash ratio of New York Community Bank was twice that of Silicon Valley Bank's bankruptcy.
Although the current explosion of New York Community Bank may not have a significant impact, what is even more tense in the market is that if this is just the tip of the iceberg, the US banking system will once again be severely tested, and the pressure on the Federal Reserve will sharply increase.
At the end of 2023, approximately 20 banks in the United States held commercial real estate loans that regulatory agencies deemed necessary for strict supervision. Analysis suggests that this signal suggests that more banks may face regulatory pressure to increase reserves.
According to data disclosed by the Federal Reserve, as of January 2024, the scale of commercial real estate loans in the US banking industry reached $2.9 trillion (approximately RMB 22.7 trillion), with commercial real estate loans from small and medium-sized banks accounting for 69% of the industry's total.
The situation of these loans will greatly affect these small and medium-sized banks, and the slightly sluggish market environment will make many parties like frightened birds. No one is sure whether the "explosion" of New York community banks will really become a "time bomb" in the industry.
Article | Reporter Leng Shuang