Valley Bank is deploying gen AI tools throughout the organization with a focus on improving its commercial client services and interactions. The $62 billion bank is working on a gen AI commercial client servicing platform that its employees can use to gain insights into client activity and open doors for personalized cross-selling, Chief Data and Analytics Officer Sanjay Sidhwani, told FinAi News. “We are now able to track at a very granular level any client’s activity, their full 360 view,” Sidhwani said. Through the platform, Valley […]
OTTAWA—The Bank of Canada’s No. 2 official endorsed a competition shakeup in the highly concentrated financial-services industry, saying the country’s banking sector is an oligopoly and changes could help lift Canada’s prolonged productivity slump.
Carolyn Rogers, the central bank’s senior deputy governor, on Thursday said Canadian authorities have done a stellar job in regulating banks by ensuring they have enough capital to survive shocks such as the 2008-09 financial crisis and the Covid-19 pandemic. “It would also be hard to argue, on any objective measure, that Canada’s banking system is anything other than an oligopoly,” Rogers told a blue-chip Toronto audience.
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The top five community banks in our ranking have combined first mortgage loans of more than $2.8 billion as of March 31, 2024. Several banks increased their loans over the last year, with one seeing an increase of more than 18.2%.
Scroll through to see which community banks made the top 20 and how they fared in the 12 months ending March 31.
Space for rent inside of the Penn 2 building in New York City in May 2024. Vornado Realty Trust paused parts of its massive redevelopment plan to remake Penn Station last year after high interest rates and the shift to working from home triggered a crisis in the commercial real estate market.
Stephanie Keith/Bloomberg
While banks’ solid underwriting of office loans is largely keeping credit issues in check for now, some lenders may need to ramp up their reserves to cover the possibility of loans flopping, according to a recent analysis by Moody’s Investors Service.
The loan-by-loan analysis of 41 anonymous banks’ commercial real estate portfolios outlines the spectrum of pain that institutions are facing. Even though Moody’s found that banks’ underwriting was more conservative than the ratings firm had anticipated, the higher-for-longer interest rate environment is increasing the need for banks to shore up their capital, said Stephen Lynch, vice president and senior credit officer at Moody’s.
“If that continues to stay elevated, it’s going to put pressure on all asset classes, Lynch said. “It made us re-assess the risk levels of these banks with higher CRE concentrations. Even if underwriting for a particular institution was good, how do you compensate for that higher asset risk?”
Moody’s found that, on average, the banks should be holding about twice the amount of reserves they currently have to cover potential office losses.
The ratings firm also determined that banks were generally more cautious about the future of office loans than they were about other types of commercial real estate. Expected defaults on office properties are at a decades-long high, according to a recent bulletin from the Federal Reserve Bank of St. Louis. The sector is a top concern for analysts and investors, as work-from-home trends and high interest rates put pressure on the values of those properties.
Highlighting those concerns, banks’ average current expected credit loss, or CECL, reserves for their office portfolios were 2.2%, or roughly double those of their multifamily and other property loans, according to the Moody’s report.
Moody’s was able to evaluate 40 banks’ office portfolios, and while it did not disclose the size range of those banks, it did say that their office portfolios totaled $31.9 billion.
Each bank seemed to evaluate their CECL reserves differently, but those with more office loans tended to allot more reserves, said Darrell Wheeler, head of commercial mortgage-backed securities research at Moody’s.
Wheeler said what surprised him, though, were the outliers. Some 10 institutions have CECL reserves equal to or higher than what Moody’s assessed, with one bank having alloted double the amount of recommended reserves. (Seven banks did not provide their loan-level CECL reserves to Moody’s.)
The office loans reviewed for the report appeared relatively stable compared with all office loans across the country, Wheeler said. Among the banks in the Moody’s report, the average office vacancy rate was 13.8%, while nationwide second-quarter trends show that vacancies in the office sector set a historical record at 20.1%.
The industry’s exposure to the CRE sector is getting banks in hot water even when specific loans appear solid. Federal Reserve data shows a correlation between higher CRE loan concentrations and lower bank stock returns.
“Concentrations are what usually get banks into trouble,” Lynch said. “Even if we view the underwriting good, the risk appetite of management to allow that concentration to exist factors into our ratings.”
Most banks currently need to have higher levels of capital and liquidity than they would in a lower-rate environment, he said, describing that conclusion as the “thesis” for recent actions the ratings firm took against certain banks.
Moody’s announced last month that it put six banks on review for downgrade due to their concentrations in commercial real estate: First Merchants, F.N.B. Corp., Fulton Financial, Old National Bancorp, Peapack-Gladstone Financial and WaFd.
The Moody’s report didn’t highlight many cohesive trends across office loans, though, Wheeler said, since individual loans at different banks are so disparate.
The St. Louis Fed’s bulletin also noted the variance in risk across commercial real estate, but it found a correlation between the size of office properties and their expected risk of default. In other words, larger spaces tend to be riskier, the St. Louis Fed researchers found.
Jordan Pandolfo, an economist at the St. Louis Fed who co-wrote the bulletin, said that while CRE concentration is a risk, it’s important to evaluate the differences between sectors, property types, geographies, banks’ underwriting and their loss provisioning.
“The big takeaway there is that commercial real estate risks are incredibly varied,” Pandolfo said, referring to the St. Louis Fed’s findings. “So it’s quite difficult to identify which banks carry the most exposure risk to CRE based upon certain statistics like concentration ratios, or what percentage of their portfolio is commercial real estate.”
The Dow Jones Industrial Average rose about 3.8% in the first six months of the year, lagging way behind the Nasdaq, up 18.1%, and the S&P 500, which jumped 14.5% — as investors plowed into artificial intelligence-related stocks.
Brendan Mcdermid | Reuters
This report is from today’s CNBC Daily Open, our international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
Boeing ‘guilty plea’ U.S. prosecutors plan to seek a guilty plea from Boeing over a charge related to two fatal 737 Max crashes in 2018 and 2019, attorneys for the victims’ family members said. The Justice Department is reviewing whether Boeing violated a 2021 settlement that shielded the company from federal charges. Boeing agreed then to pay a $2.5 billion penalty for a conspiracy charge tied to the crashes. The DOJ revisited the agreement after a door panel blew out of a new 737 Max 9 in January, sparking a new safety crisis.
Under fire Nike CEO John Donahoe faces growing discontent as the company’s stock plummeted 20% on Friday, its worst day since 1980, after forecasting a significant decline in sales. As Wall Street digested the dismal outlook from the world’s largest sportswear company, at least six investment banks downgraded Nike’s stock. Analysts at Morgan Stanley and Stifel took it a step further, specifically calling the company’s management into question.
Bitcoin windfall Mt. Gox, a bankrupt Japanese bitcoin exchange, is set to repay creditors nearly $9 billion worth of Bitcoin following a 2011 hack. The court-appointed trustee overseeing the exchange’s bankruptcy proceedings said distributions to the firm’s roughly 20,000 creditors would begin this month. The payout is likely to be a windfall for those who waited a decade, with Bitcoin’s value surging from around $600 in 2014 to over $60,000 today. One claimant, Gregory Greene, could potentially receive $2.5 million for his $25,000 investment.
Inflation cooling A key inflation measure, watched closely by the Federal Reserve, slowed to its lowest annual rate in over three years in May, with the core personal consumption expenditures price index rising 2.6% from a year ago. “This is just additional news that monetary policy is working, inflation is gradually cooling,” San Francisco Fed President Mary Daly told CNBC’s Andrew Ross Sorkin during a “Squawk Box” interview. “That’s a relief for businesses and households who have been struggling with persistently high inflation. It’s good news for how policy is working.”
[PRO] Rally will broaden The tech sector has driven market performance in 2024, with the S&P 500 tech group up 28% and Nvidia soaring 149%, while small-caps have lagged. Oppenheimer’s chief market strategist John Stoltzfus believes the rally will broaden. CNBC’s Lisa Kailai Han looks at the reasons behind his call.
It's a busy political environment for markets to navigate. Wall Street has shown remarkable resilience thanks to the AI-powered rally in the first half of the year, which has seen the Nasdaq soar 18% so far. Nvidia is up almost 150%. There could be more to come; Bank of America believes Nvidia and Apple could still deliver "superior returns."
John Donahoe was brought in from eBay to transform the athletic apparel giant's digital channels. The company ditched its retail partners, became too dependent on its aging sneaker ranges and lost ground to new contenders Hoka and On. It'll certainly make an interesting case study for MBA programs for all the wrong reasons. As Wall Street questioned Donahoe's position, he still had the approval of its founder.
Friday also saw the Fed's favored inflation measure come in line with expectations, raising the prospect of interest rate cuts later this year.
"I really think the Fed should tee up a cut at the July 31 meeting, confirm it at Jackson Hole in August and do it in September," Wharton finance professor Jeremy Siegel told CNBC's "Squawk on the Street." He added that one or maybe one-and-a-half rate cuts have already been priced in.
"I actually think there will be more because there might be a little bit more softness in the economy and better inflation numbers, both of those feeding better rates," he continued. Siegel also said it is "hard to say" where the bull market's trajectory currently stands.
In a four-day trading week — markets are closed for the July 4 Independence Day holiday — the big economic number to watch is the June jobless data on Friday. CNBC's Sarah Min has more on what to expect.
— CNBC's Lisa Kailai Han, Yun Li, Jeff Cox, Leslie Josephs, Gabrielle Fonrouge, Hakyung Kim, Brian Evans, Spencer Kimball, Ryan Browne and MacKenzie Sigalos contributed to this report.
Ella Fitzgerald was one of the first, in the ‘30s, to have a hit with the song ‘Ain’t What You Do, It’s the Way That You Do It’. The fact that legions of musicians have and continue to record it tells me there’s a universal truth there that most people recognize. This is certainly the case with generative AI. Using the innovation is cheap and easy. Making the most of it, however, demands a considered approach that’s aligned with your business goals, ensures a strong foundation is in place, and mitigates the much-publicized risks of the technology. In short, the way that you do it matters a great deal.
We’ve learnt a lot about ‘traditional’ AI over the past couple of decades, and about generative AI since it burst onto the scene about 18 months ago. We’ve helped hundreds of clients across all industries and geographies—including many commercial and multi-line banks—identify and pilot use cases and start to scale the technology across the organization. In our recent examination of the most important trends shaping commercial banking in 2024, we make the point that each of these is affected in some way by generative AI.
We’ve also progressed well beyond merely talking about generative AI. We’re currently working with many of our tech ecosystem partners to design, build and pilot prototypes for a range of use cases. In the course of our work with commercial banks, helping them develop and execute their AI strategies, we’ve learnt five important lessons which can make all the difference to your own generative AI journey:
1. Focus on the needs of the business and lead with value
It makes sense to start by harvesting the low-hanging fruit, which includes taking advantage of consumable models and applications to realize quick returns. Knowledge management use cases are a good example. At the same time, you should start to explore how generative AI can help you reinvent your products and services, your customer experiences and your business as a whole. For this you will need models that are customized with your organization’s data. You’ll also need . Prioritization will be critical, so invest time and effort in defining your business cases, setting stage gates, and assessing the desirability, feasibility and viability of each opportunity.
2. Build the right data foundation with a secure AI-enabled digital core
To make the most of generative AI you need a technical infrastructure, architecture, operating model and governance structure that meet its high compute demands. You will also need data that is more accessible, fluid and unstructured than most commercial banks currently have. Keep a close eye on cost and sustainable energy consumption—more traditional AI and other analytical approaches might be better suited to particular use cases and are certainly a lot less expensive. The ability to accurately assess the cost and benefit of each could save you a great deal of money and effort.
3. Reinvent ways of working with a people-first approach
One lesson banks are learning every day is that people are at least as critical to the success of a generative AI program as the technology. Generative AI will, to a greater or lesser degree, transform every role in commercial banking. Everyone will soon either work with one or more generative AI tools or will have the routine parts of their job automated by the technology—or both. The impact will be so extensive that nothing less than the retooling of all work and roles will be required if the full potential of this innovation is to be realized.
4. Build ‘responsible AI’ with the right risk and compliance framework
Given the speed at which generative AI is being adopted, and the very real concerns regarding its fairness, transparency, accuracy, explainability, privacy and safety, it is vital that commercial banks ensure these attributes are built in at the design stage and monitored continuously. A robust ‘responsible AI’ compliance regime should include controls for assessing the potential risk of each use case and a means to embed responsible AI approaches throughout the business. Most companies have a long way to go in this regard: our 2022 global survey of 850 senior executives found that while most recognized the importance of responsible AI and AI regulation, only 6% had a fully robust responsible AI foundation in place and were putting its principles into practice.
5. Balance rapid progress with the right operating model and governance
As the first point above implies, your approach will need to be dynamic. While facilitating rapid experimentation and agility across your different divisions, you should simultaneously adopt a centralized, coordinated strategy that establishes the building blocks, processes and governance structures that are essential to the success of your overall program. Several leading banks we are working with have established a generative AI center of excellence that serves the entire organization. This COE comprises the leaders and specialist personnel tasked with creating the roadmap, governance, core architecture and use-case development pathways to the relevant lines of business to experiment and scale at pace.
We believe commercial banking is at a crossroads. Generative AI has the potential to transform so many different aspects of our industry—from the legacy core to the customer experience, and everything in between—that we cannot afford to treat it as just another technological novelty. Only a holistic, strategic approach will avoid the pitfalls and realize the full promise of this remarkable innovation.
We hope this series has given you food for thought. If you would like to learn more, we recommend downloading our two recent reports: Commercial Banking Top Trends for 2024 and The Age of AI–Banking’s New Reality. Or you could simply get in touch—we would welcome the opportunity to discuss the potential role of generative AI with you or your team.
There’s a disconnect right now between jittery investors’ perceptions of banks’ commercial real estate exposures and the same banks’ confident assertions about those portfolios. And it’s showing no signs of easing.
Concerns about the riskiness of some CRE loans, especially in the office sector, have been hitting banks’ stock prices like a game of Whac-A-Mole. Although it seems safe to assume that the asset class will experience some stress, experts say it’s difficult to accurately assess individual loans without information that the banks often don’t provide.
As banks begin to report second-quarter earnings next month, many institutions with outsized CRE portfolios will seek to share enough information to convey stability without getting so deep in the weeds that they put investors on alert or break confidentiality agreements.
The asset class is idiosyncratic, depending on variables like geography and sector, but banks’ relationships with their borrowers and sponsors can be part of a story unseen by the public.
Jon Winick, CEO of the bank advisory firm Clark Street Capital, said there are reasons to worry about commercial real estate, but that data from banks’ earnings reports don’t jibe with a doomsday story.
“Now, the apocalyptic narrative could be completely accurate,” Winick said. “But you have to concede that there is a difference between the actual facts on the ground, what banks have seen so far in non-performing assets and what the market perception is.”
That nuance may not help banks much, though, given that investors are painting all CRE-heavy banks with a broad brush.
“When it comes to investing in banks, with investors, a lot of times they shoot first and ask questions later,” said Brandon King, an analyst at Truist Securities, in an interview. “You see that with the stock price reactions.”
Banks and thrifts hold close to $3 trillion of commercial real estate debt in the United States, according to Trepp data cited by the Federal Reserve Bank of St. Louis. Non-performing loans and net charge-offs have increased since the smooth-sailing days of 2021 and 2022, but are still hovering around, or even below, pre-pandemic levels at most institutions. CRE delinquencies are still on the rise, but the pace of the increase has begun to slow down, per data from S&P Global Market Intelligence.
Still, fresh worries continue to stir up markets. In the last few weeks, both Bank OZK and Axos Financial saw their stock prices take one-day hits of up to about 15% following reports from analysts and investors.
In May, a Citigroup analyst double-downgraded Little Rock, Arkansas-based OZK from “buy” to “sell” due to apprehension about two of its property loans — involving a 1.7 million square-foot life sciences construction project on the San Diego waterfront and a mixed-use property in Atlanta. In the report, Citi analyst Benjamin Gerlinger wrote that the rating change was rooted in the lack of tenant demand at the life sciences development and the 300,000 square feet of office space in the Atlanta building.
In response to Citi’s report, Bank OZK issued more information about the loans in a public filing, including loan-to-value ratios and the amount funded so far. The bank also reiterated confidence in its projects and capital partners. The additional disclosures helped stabilize the $36 billion-asset bank’s stock price.
However, Citi reiterated its sell rating, and OZK’s value has continued to slide, falling 23% in the last month. Piper Sandler analysts wrote in a note that they were maintaining their “overweight” position in OZK, adding that although the bank may record losses in its CRE portfolio, investors’ reaction to the Citi report was excessive.
A week after Citi released its report on OZK, Hindenburg Research disclosed its short position in Axos Financial, which the investment firm said, per its research, was “exposed to the riskiest asset classes with lax underwriting standards and a loan book filled with multiple glaring problems.”
Axos clapped back in a public filing, claiming that the Hindenburg report contained “a series of inaccuracies and innuendo that included false, incomplete and misleading allegedly factual information” regarding its loans. The bank also provided additional information to rebut assumptions made in the Hindenburg report, and wrote that its loan structure provides “a strong collateral protection even in adverse market scenarios.”
Axos’ stock price recovered some of its lost value, but it has still fallen more than 16% in the last month. Axos declined to comment for this story. OZK did not reply to multiple requests for comment.
A recent analysis by the St. Louis Fed suggests there’s a correlation between higher CRE exposure and negative stock returns at U.S. banks.
As regulators have become more focused on banks’ CRE exposure, those lenders with higher concentrations in the asset class have seen valuation dips, per a recent note by Piper Sandler analyst Stephen Scouten. In the last month, the banks whose stock values have declined the most are the ones with the highest CRE concentrations.
Bank OZK has faced scrutiny over its exposure to a 1.7 million square-foot life sciences project on the San Diego waterfront.
Adobe Stock
Investors who are brave enough to take the plunge by buying regional bank stocks loaded with CRE could have a big upside opportunity, given the right market conditions, Scouten said.
“We found an important part of this exercise to be our realization that many of these banks are being painted with the same broad brush, but that there are nuances within each bank’s exposure that will likely lead to a litany of different outcomes,” Scouten wrote.
Scouten noted that regulators seem to be pushing banks not to allow their CRE portfolios to exceed more than 300% of their risk-based capital. At Axos, the CRE to risk-based capital ratio was 238.8%, and Bank OZK’s was 365.9%, per Piper Sandler’s most recent data.
OZK and Axos are the latest examples of banks facing stock turbulence due to CRE worries, but they aren’t the most extreme cases. Earlier this year, New York Community Bancorp’s stock price tumbled some 80% after it announced that it was preparing for major unexpected losses in its real estate portfolio. (New York Community’s problems went beyond its commercial real estate exposure. The company also disclosed deficiencies in its risk management and underwriting, finally raising a $1 billion lifeline investment to overcome investors’ fears in the spring.)
Amid concerns about CRE credit quality, Moody’s Investors Service also announced earlier this month that six banks were under review to be downgraded. F.N.B. Corp., First Merchants Corp., Fulton Financial, Old National Bancorp, Peapack-Gladstone Financial and WaFD — all regional banks with major CRE portfolios — are on the credit agency’s list for a deeper dive.
At Peapack-Gladstone in New Jersey, one-third of the bank’s total loans involve rent-regulated multifamily properties, according to Moody’s. Such loans have also been a source of concern for New York Community. Peapack-Gladstone did not respond to a request for comment.
David Fanger, a senior vice president at Moody’s, said the ratings firm evaluates CRE concentration in conjunction with other earnings metrics to score a bank’s credit performance. He said equity markets are more precarious.
“When there are public announcements about commercial real estate, that can certainly drive the equity market, fairly or not,” Fanger said. “The fact is, banks are opaque. Commercial real estate lending, in particular, is opaque.”
The broken telephone dynamic between what banks say and how markets behave isn’t new. Fears about how CRE losses will impact banks have persisted for years, but they continue to build, and experts say that more institutions will face choppy waters because of their concentrations in the sector.
More disclosure by banks, and more patience from investors, could steady the ship, Winick said.
“I do believe some sort of storm is coming. It’s just, we don’t know what it’ll look like,” he said. “The mistake the regional [banks] will make is to completely deny the issue…. You can say the doomsayers are exaggerating, but you have to acknowledge that there are issues.”
Joseph Otting, New York Community Bancorp’s recently installed CEO, described a March 6 capital raise of $1.05 billion as the best decision for investors. “If the capital raise was not ready to go specifically that afternoon, the chances of the company surviving would have been at a peril,” he told shareholders.
Bloomberg
New York Community Bancorp’s new executive management team had to answer this week to shareholders whose investments in the beleaguered company have lost substantial value.
But questions from shareholders, none of whom were identified during the meeting, suggested at least some discontent in the wake of the capital influx, which significantly diluted their existing position in the Long Island-based company.
One shareholder wanted to know why investors should sign off on the additional capital, which came from an investment group led by former Trump administration Treasury Secretary Steven Mnuchin. Although the capital infusion was announced March 6 and closed six days later, New York Community was required to obtain shareholder approval to finalize the deal because of the amount of stock it plans to issue.
“If the capital raise was not ready to go specifically that afternoon, the chances of the company surviving would have been at a peril,” CEO Joseph Otting told shareholders during the meeting. “As we look back today, it was the right decision for the company, it was the right decision for the investors, and collectively we will work very hard to reestablish the value of this company going forward.”
New York Community’s annual meeting, which took place virtually, was open only to shareholders, though a recording was later made public. It was the firm’s first annual meeting with its new management team.
The new corporate leaders include Otting, who served alongside Mnuchin in the Trump administration and took over as the company’s president and CEO on April 1. Earlier this week, Otting succeeded Sandro DiNello as chairman of the board.
New York Community is the parent company of Flagstar Bank. It acquired Troy, Michigan-based Flagstar Bancorp in late 2022 as part of a strategy to diversify its loan portfolio.
Wednesday’s meeting offered a chance for investors to hear more about how executives are trying to move the $112.9 billion-asset company forward after severe challenges this year, which have been driven primarily by bad loans in its commercial real estate portfolio. So far this year, the company’s stock price has plummeted by 70%, its leadership team has been almost entirely overhauled and it has warned of ongoing pain as it roots out troubled multifamily and office loans.
Shareholders approved the proposal related to the capital infusion, as well as seven other company proposals included in its latest proxy statement. They rejected one company proposal and one shareholder proposal, both of which aimed to eliminate supermajority voting requirements.
The vote counts have not yet been released.
A proposal that would allow the bank’s board to enact a reverse stock split of issued and outstanding common stock by a ratio of 1-for-3 was among those that received majority shareholder support. A reverse stock split is a strategy that banks can put in play when their shares are trading at low figures, and they want the prices to look higher.
According to New York Community’s proxy statement, the company expects its tangible book value per share this year to be $6.05 to $6.10, reflecting shareholder dilution of nearly 40%. The company has said that tangible book value per share could rise to somewhere between $7 and $7.25 by 2026.
He also noted that the company’s shares are trading at about half of their book value, an indication that investors are skeptical that $1.05 billion will be enough to cover potential loan losses or New York Community’s weaker earnings going forward.
On Wednesday, one New York Community shareholder wanted to know if the bank could enact a policy that would protect existing shareholders’ investments in the event of a reverse stock split. In the company’s proxy statement, the board said that doing so “should increase the per share price of the common stock and make the bid price of the common stock more attractive to a broader group of institutional and retail investors.”
Otting did not commit to any such policy Wednesday, but he did say that it was “unfortunate, the situation that we found the company in when we arrived” and that the management team “appreciates the impact” that the company’s challenges have had on longtime shareholders.
“Myself and the new executive management team and the board really are here to enhance the value to all shareholders, and that is our mission ahead,” Otting said. “We really want to build a strong regional bank that serves the needs of commercial real estate customers, commercial and corporate banking customers, specialized industries and consumers.”
Another shareholder wanted to know more about the steps New York Community is taking to make sure it has adequate reserves to handle future loan losses. About 45% of the firm’s loan portfolio is made up of multifamily loans, which are under pressure due to a combination of higher interest rates and a 2019 law in New York that’s hampered landlords’ ability to raise rents.
About 4% of the book is made up of office loans, which are also facing challenges as companies reduce their office spaces in the post-pandemic shift to hybrid- and remote-work environments.
Craig Gifford, who took over as chief financial officer in mid-April, said the company continues to comb through both of those loan categories, moving from the largest loans to smaller ones. Preliminary results from those reviews are in line with the loan-loss reserves reported in the first quarter, as well as the potential for incremental reserves throughout the year, Gifford said.
Meanwhile, the company is planning to add more new faces to its executive ranks. It is hiring a new chief credit officer and someone to run its commercial and private banking unit, Otting said.
New York Community does not plan to hire a new chief operating officer, following the departure of Julie Signorille-Browne last month. Otting said Signorille-Browne’s duties have been divided up among other executives.
The company’s head of human resources and its head of technology will now report to Otting, while Gifford will oversee operations and facilities as well as procurement duties, Otting said.
Polo Rocha and Catherine Leffert contributed to this story.
Traders work on the floor of the New York Stock Exchange during morning trading in New York City.
Michael M. Santiago | Getty Images
This report is from today’s CNBC Daily Open, our international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
Nvidia passes Apple Artificial intelligence chipmaker Nvidiasurpassed the $3 trillion market capitalization mark, pushing past Apple to become the second most valuable company behind Microsoft. Nvidia’s shares have risen 24% since its blockbuster earnings report in May, while Apple’s shares are up only 5% this year as sales growth stalled in recent months.
Baron backs Musk’s pay deal Billionaire investor Ron Baron has publicly defended Elon Musk’s controversial $56 billion Tesla pay package. The Baron Capital chairman and CEO argues the package, tied to “aggressive” performance targets, is justified as without Musk “there would be no Tesla.” Baron previously revealed that his firm has made about 20 times its investment in Tesla since he first bought the stock in 2014. The package, previously voided by a Delaware judge, will face a shareholder vote on June 13.
Elliott retakes SoftBank stake Elliott Management, an activist investor, has taken a $2 billion stake in SoftBank and is pushing for a $15 billion share buyback. This marks the second time Elliott has taken a stake in the Masayoshi Son-led firm. In 2020, at Elliott’s urging, SoftBank launched a $20 billion share buyback and asset disposal program. Elliott believes another buyback would boost SoftBank’s share price and signal confidence in CEO Son’s plans, particularly in AI.
Electric air taxi gets FAA signoff Shares of Archer Aviation soared 6% after the Federal Aviation Administration granted the electric air taxi maker a key certification that would allow the company’s aircraft to eventually carry passengers. Archer, which has won orders and backing from United Airlines, is building electric vertical takeoff and landing aircraft for urban areas, which could reduce carbon emissions. Archer has partnered with automaker Stellantis to produce hundreds of the electric air taxis.
[PRO] Buy the dip While investors are concerned about this biotech company’s potential loss of exclusivity and rising competition, Goldman Sachs sees an upside of more than 60%. The Wall Street bank believes investors should buy the dip and consider its “overlooked” pipeline.
Billionaire investor Ron Baron's support of Elon Musk's $56 billion compensation package almost feels like looking in the rearview mirror. Nonetheless, it's a crucial intervention just ahead of next week's vote on what would be corporate America's biggest compensation package.
Shareholder advisory firms, Glass Lewis and ISS, have told investors to reject the award. In voiding the original package, the judge said the process was flawed because of the close relationship the compensation committee had with Musk. For example, Robyn Denholm, the chair of Tesla, sold some of her Tesla options for $280 million between 2021 and 2022 — a "life-changing" transaction, as she described it. Other members of the team had relationships with Musk going back 15 years or more and regularly vacationed together.
The package has no salary or cash bonus and sets rewards based on Tesla's market value rising to as much as $650 billion over the 10 years from 2018. The court also found the defendants did not prove the package was necessary to retain Musk.
At its height, Tesla reached a market capitalization of $1.2 trillion in November 2021. Since then, the EV market has slowed and competition has intensified. Its current market cap is $560 billion. While Baron remains bullish and has made and expects to make a lot more money from Tesla, other investors expect the company's stock to fall by as much as 30%.
Who would bet against Musk? He took a niche vehicle manufacturer that has flirted with bankruptcy and challenged Detroit, and now plans to reinvent the EV maker into a leader in AI and robotics.
Still, Wall Street has a new favorite in Nvidia. It passed the $3 trillion mark and surpassed Apple to become the second most valuable U.S. company. Before Thursday's record high, UBS noted that Nvidia's year-to-date gain is responsible for a significant chunk of the S&P 500's 2024 rally.
"NVDA accounts for 30% of the market's return YTD," wrote strategist Jonathan Golub in a Wednesday note to clients. "S&P 500 returns drop from 11.3% to 7.8% ex-NVDA. Many stocks have moved in step with the AI theme."
While some caution a bit of profit-taking, the company's 10-for-1 stock split should encourage side-lined retail investors to take a slice of the AI frenzy. Bank of America still sees an upside to the stock.
— CNBC's Brian Evans, Alex Harring, Darla Mercado, Kif Leswing, Rohan Goswami, Leslie Josephs and Yun Li contributed to this report.
U.S. Bancorp in Minneapolis has promoted two longtime executives into expanded roles leading two areas of the company’s wealth, corporate, commercial and institutional banking division. Stephen Philipson and Felicia La Forgia will continue to report to U.S. Bancorp President Gunjan Kedia, the company said.
Stephen Philipson is now leading all of the product businesses within U.S. Bancorp’s wealth, corporate, commercial and institutional banking division, the company said in a press release. Meanwhile, Felicia La Forgia will oversee a newly created unit within the same division called the Institutional Client Group, which will focus on distributing resources to institutional clients.
Kedia had been running the wealth, corporate, commercial and institutional banking division for a little more than a year when she was promoted last month to president, a role that potentially sets her up to succeed CEO Andy Cecere. While Cecere has given no indication that he’s ready to retire, both he and his most immediate predecessor held the role of president before they became CEO.
Philipson, who joined U.S. Bancorp 15 years ago, most recently oversaw the global markets and specialized finance segment within the wealth, corporate, commercial and institutional banking unit. He joined the bank in 2009 as the deputy head of high grade fixed income after having worked at Wells Fargo, Wachovia Securities and Morgan Stanley, according to his LinkedIn profile.
He will continue to sit on U.S. Bancorp’s 16-member managing committee, the company said.
“We want to be the go-to bank, the one clients know they can rely on to solve problems they didn’t even know they had and help them reach goals they couldn’t have imagined possible,” she said in the article.
Both Philipson and La Forgia will continue to report directly to Kedia. As president, in addition to overseeing wealth, corporate, commercial and institutional banking, Kedia also oversees U.S. Bancorp’s other two business lines: payment services and consumer and business banking.
Philipson is “known for his deep product knowledge and offering innovative solutions,” and in his new role will elevate “relationship channels into a stronger and more cohesive unit,” Kedia said.
And La Forgia “will drive consistency and excellence in regional and sector coverage across all our corporate, commercial and institutional clients,” Kedia said.
The wealth, corporate, commercial and institutional banking division contributes 37% of U.S. Bancorp’s total net revenue, the same percentage as consumer and business banking, according to a presentation that U.S. Bancorp prepared for a conference last month.
The division covers a broad list of segments, including wealth management, asset management, capital markets, global fund services, corporate banking, commercial banking and commercial real estate.
We’re all still trying to get our heads around the big question confronting all commercial bankers right now: how and where will generative AI have the greatest impact? In our recent analysis of the top trends shaping the industry in 2024, we argue that each one is influenced to some degree by generative AI. In this second post we explore where within the bank early adopters are applying this transformative technology.
The aspiration—to steal from the title of last year’s Best Film Oscar winner—is “everything, everywhere, all at once”. But if we must admit that universal deployment is unrealistic, the challenge becomes one of prioritization. We analyzed banking tasks, roles and functions, based on our experience of working with a large number of leading banks worldwide, and identified four focus areas where commercial banks are likely to achieve the greatest immediate impact:
1. Empowering relationship managers
Every relationship manager (RM) we’ve met laments the time they spend identifying which clients they should speak to, which policies and procedures they need to refer to, and which client information they need to collate from a disparate array of internal and external sources. Generative AI can relieve them of much of this, allowing them to prepare better and spend more time in more impactful meetings with more clients.
As part of their CRM platform, generative AI can provide RMs with prioritized leads. It can specify each client’s most urgent needs and their preferred method of engagement. It can also generate proactive outreach, whether that is an email, a conversation script or a formal proposal. Most importantly, it can help RMs increase sales by using new insights to create intimate relationships where the right products are provided at the right time—even if the client hasn’t thought through the need. Interactive real-time dashboards can monitor the effectiveness of each campaign, enabling continual improvement. Knowledge management and performance coaching tools can also improve RMs’ capabilities faster and deliver more consistent client services irrespective of the banker’s level of experience.
One phenomenon that we’re seeing among those of our clients that are pursuing more intelligent front-office processes is a levelling of capabilities across the RM population. Top talent continues to improve slightly, but we are seeing a massive growth in performance within some of the lower levels. Together, this is significantly boosting the organization’s win and growth rates.
2. Streamlining commercial underwriting
Few commercial banks are able to get funds to clients as quickly as they would like. Those that can outpace their competitors without incurring greater risk stand to increase market share, revenue and client satisfaction. As I mentioned in the first post in this series, in most commercial banks this and other operations continue to be highly manual and human-intensive. There is endless variation of products, segments, regions and policies that overcomplicate the process and prolong the time-to-decision. These delays are a major driver of cost inflation within the bank, and those who can develop a solution will be positioned to win in the marketplace.
By modernizing origination platforms and introducing generative AI, leaders are succeeding in this quest. Most are prioritizing the automation of what was formerly manual content production—for example spreading, credit memo generation and other document generation. They are also using it for four-eye checks across the application lifecycle to ensure the right information is captured. Solutions in each of these areas involve varying levels of functional complexity, integration and risk, which must be well understood to accelerate modernization.
3. Enhancing risk management and compliance
Commercial banks are currently investing more effort and capital to meet their expanding risk and compliance obligations. Generative AI has the potential to streamline this on multiple levels.
The technology can be used to automate tasks and augment staff in complex regulation-driven processes such as KYC and AML in the client onboarding stage. It can be used to enhance natural language processing (NLP) tasks, such as extracting the relevant KYC data from a variety of documents containing text, graphs and other imagery. It can update client details, making note of the change and the source of the new information. While generative AI is also able to automate many regulatory reporting and monitoring tasks, it is more likely to be used initially to augment staff, whose human checks on accuracy remain critical to the process.
4. Increasing change velocity
Compressed change is a vital goal in a fast-evolving industry where program directors are expected to deliver more with less. Generative AI can help, across the transformation lifecycle.
By augmenting team members, the technology can facilitate the development of epic and user story documentation. The automation of repetitive tasks and code generation processes helps developers create and execute functional codes. This cuts development time and allows the developers to concentrate on more complex tasks. Generative AI is also being used to thoroughly analyze large datasets to identify and rectify code faults. This analysis automatically processes vast amounts of data to identify patterns and potential threats or issues, thereby enhancing the accuracy of project specifications and requirements.
Generative AI streamlines the testing phase, raising the overall quality of software products. It quickly pinpoints anomalies or threats and uses automated test cases and scripts to speed up the process. This ensures more thorough testing coverage and more efficient and effective defect identification. The result is higher-quality products delivered in a shorter timeframe.
In the next and final post in this series, we will share the five things commercial banks can do to ensure they derive the greatest possible benefit from generative AI. In the meantime, if you would like to find out how this innovation is influencing the forces shaping the future of commercial banking, you can download Commercial Banking Top Trends for 2024. If you would like to chat about any aspect of this topic, please get in touch—we’d welcome the opportunity to discuss your bank’s journey to generative AI.
I’d like to thank my colleague, Auswell Chia, for his contribution to this post – Auswell has been working closely with a number of our financial services clients as they develop and implement their generative AI strategies. We would like to also thank Julie Zhu and Gustavo Pintado for their contributions.
Workers enter Goldman Sachs’ headquarters in June 2021. The investment banking giant said in a memo in 2019 that it would relax its dress code.
Michael Nagle/Bloomberg
WASHINGTON — Almost 40 years ago, Gordon Gekko declared “Greed is good” in the 1987 movie “Wall Street.” Michael Douglas’ iconic character, decked out in sharply tailored suits and slicked back hair, came to represent what many thought titans of the financial sector looked and dressed like.
But gone are the days of the suits and suspenders, power ties and polished shoes. To be sure, the financial sector is less dominated by men today than it was in the 1980s when Douglas popularized the Gekko image, and overall women’s fashion has undergone its own set of changes. Instead, bankers, especially men, are now embracing a more casual style and less conspicuous consumption, while still projecting a sense of dignity and gravitas. This mirrors broader changes in social norms, corporate culture and client expectations.
“Bankers have engendered, by the very definition of their work, financial responsibility in all their business relationships and should be dressed in a sober capacity but one that still represents their background and integrity,” said Richard Press, who ran J. Press in New York for over three decades before it was acquired by the Japanese apparel firm Onward Kashiyama in 1986. “I think that’s best represented by wearing a natural shoulder dark gray suit with an appropriate repp-stripe or emblematic tie that provides the image of fiscal responsibility.”
A history of business fashion
Crucial to understanding the foundation for what is considered proper business attire today for men is the history of tailored suits. Derek Guy, a menswear expert who goes by @dieworkwear on the social platform X, says the archetypal banker look largely originates from the longstanding traditions of a certain social class in England. Until the last century, British professionals split their time, and getups, into two distinct modes. (For full disclosure, I am an aficionado of men’s fashion and because of that, I have focused mostly on menswear in this story. I’ll leave commentary on women’s business attire to others who are more suited to that task.)
“The upper class in Britain had wardrobes that were divided between the city — in this case the city London — where you did business and the country where you pursued sport, and that was often Scottish estates,” Guy said.
City wear consisted of generally more conservative attire. That meant darker suiting, solid shirts, black footwear, silk scarves and charcoal or black overcoats — often in the Chesterfield style with a velvet collar. Country attire was all about sporting, and would include heavier wool tweeds, tattersall or tartan patterned shirts, brown pebbled leather shoes and tweed flat caps.
Though menswear styles have changed over the decades, hints of those conventions can be felt in Gekko’s look — designed by renowned clothier Alan Flusser. The character specifically wore shirts with a more formal, stiff spread-collar reminiscent of an English banker style.
Overall, Douglas’ costumes in “Wall Street” were a composite caricature of the most ostentatious aspects of city banker attire of the 1980s. Flusser based Douglas’ wardrobe for the movie on what Wall Street power brokers at the time wore when they became successful.
“In those days, when guys made a lot of money, they went to Savile Row to get the clothes, shoes and everything else made,” said Flusser, referring to the area of London well known for its bespoke clothing for men. “That was the top of the sartorial mountain as such.”
Flusser noted the cultural impact of the movie was quite massive. “It was really remarkable. We couldn’t make clothes fast enough to address — no pun intended — all the people coming in who wanted to look like their version of Michael Douglas,” said Flusser. “Gordon Gekko is still kind of an influence — even if it’s unconscious — in the way some people want to look.”
For decades, Press clothed many Wall Street bankers from his Ivy League-inspired menswear boutique, J. Press. The company was founded in 1902 by Press’ grandfather, Jacobi Press, on Yale University’s campus. It still maintains brick-and-mortar stores in major East Coast hubs.
However, unlike the Gekko character, Press said that many male bankers, especially those who were Ivy League graduates, preferred button-down shirts which had soft, billowing collars anchored down by buttons. While often considered a more informal type of shirt in business attire, the buttoned collar style was a signature of Ivy League dress throughout the 20th century and continues today.
“A very large percentage of our custom [and] bespoke customers at that time were bankers,” he said. “For daytime wear, their outfits were usually gray suits, whether it was solid, pinstripe, dark, flannel or herringbone.”
But as Guy noted, this standard is decades out of vogue. The suit and tie have been in recession for years now. “I don’t think many people wear that anymore,” he said. “Over the last 80 years the tie has been on a slow descent and went into free fall after the casual Fridays of the 1990s.”
Things got casual
When thinking about Wall Street firms, there are few more prominent than the white-shoe investment banking giant Goldman Sachs. It’s the company that young and hungry recent college graduates with degrees in finance and economics strive to work for.
Given this reputation, it was rather shocking when the company announced, in 2019, that it was shifting toward a more casual dress code. Though the memo outlining the change didn’t provide specifics, CEO David Solomon wrote, “All of us know what is and is not appropriate for the workplace.” Certain divisions within Goldman had been allowed to dress more casually before the change became companywide.
At the time of the announcement, one news report called the move “once unimaginable” for the company’s “monk-shoed partners and bankers in bespoke suits.” Goldman declined to comment for this story.
The shift was a stark example of the suit being in decline for the banking sector. This move reflected a broader trend away from formal office attire and tied into evolving client expectations and the growing influence of the highly casual tech sector.
However, some expressed concerns that it may have introduced ambiguity regarding what constitutes ‘appropriate’ office attire.
“They just said, ‘You can dress more casually except for times where you clearly need to wear a suit,'” said Guy. “And then I think their vague advice was, ‘We all know what is acceptable and not acceptable’ … but no, many people don’t know what’s acceptable or not acceptable.”
Alex Klingelhoeffer, currently a wealth advisor at the Oklahoma City-based Exencial Wealth Advisors, began his career at a Charles Schwab call center in Austin, Texas, in 2013, right as the company would make a sharp turn in its office attire expectations. Klingelhoeffer said shortly after arriving at Schwab, norms were relaxed in an attempt to appear more approachable. The change meant that ties, rather than being the standard for dressing up, now represented a stuffy and outdated look. The firm, said Klingelhoeffer, was attempting to stay current by casualizing attire.
“We couldn’t make clothes fast enough to address — no pun intended — all the people coming in who wanted to look like their version of Michael Douglas,” said clothier Alan Flusser. “Gordon Gekko is still kind of an influence — even if it’s unconscious — in the way some people want to look.”
Rose Callahan
“The first year I’m there in 2013 — basically right out of school — you want to look sharp: Brooks Brothers tie, a striped shirt and a Hart Schaffner Marx suit I couldn’t afford — but whatever, you gotta look sharp,” he said. “The next year, same deal, we’re doing our executive meeting this quarter in Austin [we were told] ‘no ties, we’re approachable.'”
Klingelhoeffer attributes the relaxed dress code to the rise of the technology sector. At the time, tech companies overtook financial and energy companies to boast the largest market caps and were, therefore, more popular to invest in. Silicon Valley famously has a more informal dress code. (To reference another popular movie about business, see Mark Zuckerberg’s hoodie and flip-flops in “The Social Network.”)
The shift in the kinds of clients showing up to meetings meant that approachability became more important than dressing conservatively.
“It went from energy back in like the 2000s, then it was finance in 2005 and [from] 2013 and on it’s been tech; and whatever is popular from an investment sense, a financial sense and almost from a cultural sense, that’s where the fashion follows,” he said. “I think the thing to always remember is that banking is a service industry, there’s a lot of technical stuff, but it’s ultimately about clients.”
Klingelhoeffer said the trend has only been amplified over time particularly with the effects of remote work scrambling the traditional workplace model. This is especially pronounced with high value clients who are no longer required to be physically present or dressed formally to engage in business. Fridays, Klingelhoeffer said, are typically quiet in offices, particularly in client-facing roles, as clients are often away at country clubs or on vacation. Klingelhoeffer emphasized the importance of being available in these settings to address clients’ inquiries effectively.
“For whatever reason, for people of means these days: Monday is like a holiday, Friday is like a holiday. You get some stuff done Tuesday through Thursday and then from Thursday afternoon onwards it’s like whatever, they’re kind of working, kind of not,” he said. “You used to have clients that show up in a suit or whatever, that sort of thing. [You] never [see that now,] it’s golf shirts, T-shirts.”
He further illustrates this change by describing the CEO’s attire at meetings.
“Our CEO will come into meetings with, you know, jeans and a nice belt or whatever … and a nice print shirt,” he said. “To me, that’s like the uniform … that’s what you’ll see like higher powered execs in anytime they’re on camera, more or less.”
Klingelhoeffer noted that while this casual attire is less fussy than the previous uniform, there are regional nuances to what is considered appropriate. Bankers have to adjust their attire to meet their clients’ expectations.
“When you go down to [Dallas Fort Worth International Airport], you see a ton of dudes in like L.L. Bean fleece vests with weird colored socks and loafers because they’re all working with private equity guys out of Dallas,” he said. “Occasionally they’ll throw on some boots and go over to Fort Worth, because they’re helping guys out in the Permian [Basin] finance their oil companies. So ultimately, whoever your clients are, the dress is gonna flow from that.”
Jessica Cadmus, founder of Rogue Paq Accessories and a stylist at Wardrobe Whisperer, has made a career out of styling Wall Street professionals. Cadmus emphasized the importance of her clients projecting a polished image, tailored to their individual preferences, while remaining open to the aesthetic preferences of their clients.
“You want to try to match the vibe while always being neat, clean and polished,” she said. “Ostentatiousness with clients is typically frowned upon,” she added. “The unwritten rule is to avoid conspicuous consumption, which definitely pertains to attire.”
Cadmus highlighted the importance of personal branding and appearance on Wall Street. While codes have relaxed, there are still red lines for bankers, as certain clothing choices are universally deemed unsuitable for a banking setting. For example, she says denim is typically relegated to Fridays in many prominent firms. And typically larger firms tend to be still more formal in their clothing requirements while smaller companies are more casual. She noted that Goldman Sachs and Morgan Stanley usually set the standard. Morgan Stanley declined to comment for this story.
“Most of my banking clients are either asking for, or being trusted with, large amounts of money and, so, personal appearance needs to convey trustworthiness or, at the very least, competence,” she said. “Visible tattoos for client-facing employees remains a bit of a taboo [as are] open-toed shoes for women and white pants for men.”
When it comes to setting the gold standard for Wall Street banker attire, Cadmus said certain firms lead the way. She says Wall Street attire — like the business itself — also reflects a hierarchical culture, where seniority influences attire choices. While cleanliness and polish are universal expectations across all levels, the details of attire evolve as individuals progress through the ranks.
“If you just focus on watches, a VP would typically wear a Cartier Tank watch — these days with a leather strap versus a metal strap — and a senior [managing director] or partner — as they still call them at Goldman — would more likely wear a Panerai or a Patek Philippe,” she says. “If a junior person came in sporting a Patek Philippe that would be frowned upon.”
While subtle expressions of success are still prevalent, she says good taste dictates keeping overt displays of wealth to a minimum. “Actually, it would be more likely that the partner would wear a Timex to work but have a collection at home that would include a Panerai, Patek Philippe, a Rolex and maybe a Favre-Leuba,” she said.
A pedestrian passes a shop window on Savile Row in March 2022. That area of London is well known for its bespoke clothing for men.
Hollie Adams/Bloomberg
Are ties gone forever?
Wall Street business attire has been trending toward the more casual. But experts are split on whether this is a permanent change. Guy thinks the days of neckties are squarely behind us. “I talked to high-end clothiers and one told me that he thinks of his necktie collection now as just part of the store’s decor, the way that TGI Fridays puts up those chintzy roadside signs … it’s just a way to set the mood,” he said.
Some, like Cadmus, have a more nuanced perspective on the trajectory of fashion trends. While she remains skeptical about the complete resurgence of the formal styles prevalent in the ’80s and ’90s, she acknowledges a shift within the industry away from the exceedingly casual norms that emerged during the pandemic era.
“At recent conferences, my clients were reporting more formal attire overall — suits and no ties, versus what they experienced over the last few years, which was more blazers and no suits at all,” she said. “Women have made a large shift toward dresses — or pants and blazers — versus the corporate suit that was a staple for years.”
Womenswear, she added, has undergone some of the most stark changes, with dresses and new kinds of footwear being worked into financial professionals’ rotations. For example, she said Maxi dresses are currently in vogue for women as are chunky loafers and shorter boots. “Akris has excellent workwear dresses as does Max Mara and brands like The Row, Diane Von Furstenberg and Loro Piana,” she said. “As for shoes, block heels have largely replaced the pump. This past winter we saw a resurgence of boots that ended below the knee versus the to-the-knee and higher boots we’ve seen the last several years.”
Data indicates that as the banking industry continues to adjust to the new normal, there might be a wider cultural movement toward adopting slightly more formal attire as the pandemic becomes a distant memory.
As employees make their way back to the office, Rent the Runway, a wardrobe rental service, experienced a significant increase in the demand for workwear rentals during the summer of 2023. This surge suggests a potential revival in the requirement for office-appropriate clothing, reminiscent of trends observed prior to early 2020.
According to the Partnership for NYC, 65% of financial sector employees are back to work, one of the highest rates across all sectors. Additionally, observations from Morgan Stanley’s 2023 annual financial conference revealed a notable increase in formal attire, with only roughly half of the executives opting to forgo ties compared with 81% in 2021.
Circana, a firm which tracks consumer behavioral data, highlighted a notable boost in the tailored clothing market in 2023, with sales revenue surpassing even pre-pandemic levels by 8%. This resurgence in tailored clothing sales suggests a renewed interest in traditional business attire as professionals readjust to in-person work environments.
Made-to-measure menswear retailer Indochino’s record-setting revenue in the first quarter of 2023 further corroborates this trend, signaling a growing demand for tailored clothing among consumers across the board.
As the return-to-office trend gathers steam, it seems that the general public is inclined toward a sharper appearance compared with recent years. This suggests that it might only be a matter of time before the effect trickles upward, influencing bank clients to adopt more tailored attire, thereby influencing bankers to do the same.
As new sales of tailored clothing have increased, the market has evolved to include styles which blend formality and approachability, such as J. Crew’s more casual Ludlow suits and loafers as opposed to laced dress shoes.
“The biggest way [to stay up-to-date] for men is largely losing the tie and the biggest way for women is largely ditching heels, or maybe wearing them once or twice per week instead of daily,” Cadmus said. “[Loafers] are a huge trend and they are meeting that middle ground in dress that is the current sweet spot.”
Guy argued relaxed workplace norms can allow professionals to find freedom in their attire selection. He says the days of being reprimanded for eschewing a tie seem like relics of a bygone era.
“For the guy who’s trying to just look appropriate for the office, to me that’s not, it’s not too difficult. Like you could go to Brooks Brothers, J. Press or even J. Crew, buy a few pairs of at least chinos, if not wool trousers, a button-up shirt and maybe buy at least one tie if you really need it, but you probably don’t,” he said. “The nice thing about our current kind of dress culture is that you can wear whatever you want, with very little recourse.”
Flusser noted that informality does not necessarily mean poor dress. He argued comfort does not necessarily mean schlubby.
“Now the question is, how comfortable can you be, are you allowed to be, and still look business-like,” he said.
Cadmus notes that with companies still trying to enforce their return-to-work mandates, attire is somewhat a secondary concern.
“Things are still a bit all over the place with some people wearing suits at one end of the spectrum, and some people still trying to get away with denim and/or sneakers,” she said.
“Firms are so focused on just getting people back in the building that they are not yet completely cracking down on dress,” Cadmus added.
Earlier this month, Eagle Bancorp in Bethesda, Maryland, filed a shelf registration statement that would allow it to raise up to $150 million.
Eagle Bancorp in Bethesda, Maryland, set the table to raise money after a bruising first-quarter loss and a steep credit provision linked to an office property in downtown Washington, D.C.
The $11.6 billion-asset Eagle this month filed a shelf registration statement with the Securities and Exchange Commission for the offering of up to $150 million. It enables the company to increase debt and issue common or preferred stock at any point over the next three years.
Eagle Chief Financial Officer Eric Newell described the move in an interview “as good corporate housekeeping” that “gives us flexibility” — as opposed to a sign the company needs to raise capital.
He said that, should the company raise money, it would likely be done through a debt or preferred stock offering. Newell also noted that Eagle has subordinated debt maturing in September, and the shelf registration allows the company “to be opportunistic” as it considers refinancing that obligation.
Eagle recorded a $35.2 million provision for credit losses in the first quarter on an office property in Washington whose value was reappraised at about half of its prior value.
Commercial real estate makes up more than 60% of the bank’s loans. Urban office CRE, in particular, is under pressure across the industry as landlords grapple with higher vacancy rates amid enduring remote work trends.
Eagle’s shares traded between $19 and $20 intraday Thursday, down more than 30% from the start of the year.
Though Newell described Eagle’s recentcredit quality challenges as manageable and its core earnings power as strong, the registration does give the company options to raise money should it need to offset more credit issues in its CRE portfolio.
Newell said federal government work forces that pepper the capital city’s downtown have been affected by remote work. But he emphasized that the bank’s CRE book is spread across various sectors and markets, including the D.C. suburbs. He said the first quarter office hit was not indicative of systemic issues in the bank’s loan book.
“Not every office property is downtown, and not every CRE credit is an office loan,” Newell said.
Michael Jamesson, a principal at the bank consulting firm Jamesson Associates, said lenders are increasingly scrutinizing their CRE portfolios and charge-offs are accumulating. But, he said, banks for the most part are reporting “one-off or two-off” loan problems and ensuring investors that the isolated challenges are not thought to mark the beginning of broader and rapid credit quality deterioration.
“Now, banks always say that, but the data seems to validate the story for now,” Jamesson said. “At this juncture, it looks like we’llget through this with some scars, yes, but not many fatal wounds.”
Provisions for expected credit losses across all U.S. banks declined in the first quarter to $21.1 billion from $24.4 billion the prior quarter, according to S&P Global Market Intelligence data. The decline came as net charge-offs held essentially flat at $20.3 billion. First-quarter provisions as a percentage of charge-offs fell to 104% from 121% the previous quarter, suggesting banks on the whole seeimproving conditions ahead, according to S&P Global.
“I’m sure we’ll see more signs of stress at points this year, and some banks will have more problems than others,” Jamesson said. “I don’t see a calamity in waiting.”
In its SEC filing earlier this month, Eagle said if it decides to raise all or some of the $150 million, it could use the money to refinance debt — its debt maturing in the fall totals about $70 million — or it could use the funds to bolster capital, pay dividends or buy back shares.
For the first quarter, the company reported net charge-offs of $21.4 million, up from $11.9 million the previous quarter. Nonperforming assets of $92.3 million equated to 0.79% of total assets, up from 0.57%.
Capital levels were lower than in 2023, but all measures exceeded regulatory requirements. Eagle described its capital positions as “strong.”
At the close of the first quarter, the common equity ratio, tangible common equity ratio, and common equity Tier 1 capital to risk-weighted assets ratio were 10.85%, 10.03%, and 13.80%, respectively.
Eagle reported a net loss of $338,000 for the first quarter, compared to net income of $20.2 million for the fourth quarter of 2023.
However, the bank’s pre-provision net revenue of $38.3 million for the first quarter was nearly even with the prior quarter’s $38.8 million.
“We earn really well,” Newell said. He said that, once the bank works past the recent credit set-back, this could be evident in future quarters.
As far as downtown Washington office properties, Newell said some areas of the federal government have proven slow to bring workers back to offices full time. But he said Eagle is bullish on the nation’s capital because the long-term trajectory of the federal government is one defined by substantial growth. The District of Columbia’s economy, by extension, is likely to expand in tandem.
Of the capital’s ties to federal spending, Newell said, “we believe it is still a differentiator in a positive way.”
Spring is a time when most people, bankers included, take a fresh look at the challenges they face and tackle them with renewed vigor. Commercial banking should be on this year’s spring-cleaning list. While it is often the bank’s largest revenue generator, its processes continue to be highly manual, constraining the potential for profit growth. Our Commercial Banking Top Trends for 2024 report highlights the most critical issues, and it’s no surprise that generative AI features in all of them.
To dive deeper into the potential of generative AI across commercial banking, we are working closely with our top commercial banking leaders in North America, Europe and Asia Pacific to put together a three-part series that will help generate ideas for our clients as they start and scale their generative AI journey. While many banks continue to struggle with when and where to begin, we are well underway with a handful of clients to drive the art of the possible to reality with generative AI. We wanted to reflect and provide perspective on the lessons we’ve learned so far.
Generative AI has sparked a great deal of excitement. That’s obviously because of its potential to transform so many different aspects of our life and work, in ways that are difficult to predict beyond the next few years. But it’s also because the technology is evolving so rapidly that most people struggle to keep up.
We see a fundamental difference in how commercial banks are typically approaching generative AI. On one end of the spectrum, ‘Experimenters’ are focusing on piloting, proving and ultimately scaling use cases that deliver specific benefits to customers, employees or regulators. On the other end, ‘Reinventors’ are looking at entire experiences and value chains and making far-reaching changes to their operating model while introducing a combination of technologies, including generative AI, to systematically create competitive advantage through human and machine collaboration.
There is no one-size-fits-all approach for commercial banks, and many find themselves somewhere between these two extremes. One of our more innovative clients is using a combination of generative AI and human agents to reach customers with personalized, insight-driven offers at a much lower cost to serve and acquire than its competitors. At the same time, it is using generative AI to automate and augment operations to reduce ‘time to yes’ and ‘time to cash’. No commercial bank can afford to downplay the transformative potential of generative AI for its organization and its customers. The challenge is not whether to explore this innovative technology, but where to start and how to scale rapidly.
We would like to thank our colleagues, Julie Zhu and Gustavo Pintado for their contributions to this post for his contribution to this post. In our next post, we will share what leading commercial banks are doing to generate immediate value. In the meantime, if you would like to know more about this topic, we’re sure you’ll find our two recent reports useful: Commercial Banking Top Trends for 2024 and The Age of AI–Banking’s New Reality. Or you could simply contact us—we’d love to chat with you about your bank’s journey to generative AI.
In addition, if you’re planning to attend this year’s nSight2024 in Charlotte, please make sure to connect with our Accenture experts. We’ll have a booth and will moderate multiple sessions, including two on AI and commercial banking. Learn more about our presence as the exclusive diamond sponsors of nSight.
New York Community Bancorp’s new management team has plotted out a path to improved profitability, but they say 2024 will be a “transition year.” It remains to be seen just how rocky the next eight months will be.
The Long Island-based company, whose apartment-heavy commercial lending portfolio landed it in hot water earlier this year, warned investors Wednesday there will be more pain in coming quarters as it continues to root out troubled loans. Charge-offs and loan-loss provisions will be elevated this year before returning to more normal levels in 2025 and 2026, executives said.
Borrowers have so far shown “amazing resiliency,” new CEO Joseph Otting, the former top bank regulator, told analysts during the company’s first-quarter earnings call. Still, net charge-offs were $81 million during the quarter, while the provision for loan losses totaled $315 million — far above where both metrics were a year earlier. Nonperforming loans also skyrocketed year over year, totaling $798 million as of March 31.
The company said it is guiding for $750 million-$800 million in provisions for all of this year. It then expects that figure to drop to $150 million-$200 million next year and in 2026.
Analysts say there are still a lot of unknowns. One big question: How will New York Community, which has gone through significant turmoil since late January, ultimately close the gap between its current performance metrics and what the management team is aiming to achieve by 2026?
“I think it’s clearly still in the early stages” of a turnaround, said David Smith, an analyst at Autonomous Research who covers the bank. “They put out a more robust and detailed set of expectations than most investors expected, but it’s still a ‘Prove it’ story.”
Otting, who has been CEO for about eight weeks, expressed confidence that the new management team and restructured board of directors can get the $112.9 billion-asset company back to profitability. The company reported a $327 million net loss in the first quarter.
Otting, along with former Treasury Secretary Steven Mnuchin, turned around the failed IndyMac Bank and eventually sold it for a large profit. The two teamed up again in the New York Community rescue, which required a $1 billion capital infusion.
“We’ve done this before,” Otting said on the call. “And we feel we can do it again.”
Investors seemed to agree, at least a little, driving up the stock price by 30% Wednesday to $3.44 per share.
New York Community’s troubles began on Jan. 31 when the company reported a sizable fourth-quarter loss, signaled trouble in its commercial real estate loan portfolio and slashed its dividend, sparking a 37% decline in its share price. The sell-off continued in February, in part because of ongoing uncertainty about the company’s loan books. The surprise $1 billion investment, led by Mnuchin, was intended to ease the turmoil and bolster the company’s capital levels.
The plan laid out Wednesday includes both short-term and medium-term goals.
In the near term, New York Community, which is the parent company of Flagstar Bank, plans to sell or run off noncore assets, work out problem loans and reduce its operating expenses. Medium-term targets include diversifying the loan portfolio, which is currently dominated by multifamily loans; growing core deposits as a way to improve the company’s funding base; and increasing fee income.
A deal to sell noncore assets worth about $5 billion may be in the works, management said Wednesday, though they did not provide additional details about the asset class.
By the fourth quarter of 2026, New York Community aims to achieve a return on average assets of 1% and a return on average tangible common equity of 11%-12%. It is also targeting a common equity Tier 1 capital ratio of 11%-12%. That ratio was 9.45% in the first quarter.
Return on average assets was negative 1.13% in the first quarter, while return on average tangible common equity was negative 10.02%.
“We’ve done this before,” New York Community Bancorp CEO Joseph Otting said Wednesday, in reference to the earlier turnaround of a failed bank that he and former Treasury Secretary Steven Mnuchin engineered. “And we feel we can do it again.”
Patrick T. Fallon/Bloomberg
In recent weeks, the new management team has taken a “deep dive” into the health of the bank’s commercial real estate portfolio, said Craig Gifford, New York Community’s chief financial officer. The review covered both the bank’s $36.9 billion multifamily book and its $3.1 billion office loan portfolio.
The office portfolio makes up just 4% of the bank’s loans, but it’s part of a sector that’s been suffering a “high degree of stress,” Gifford said. The review of office loans, conducted with the help of an independent party, has thus far covered 75% of that portfolio.
Executives have set aside a sizeable chunk of reserves to cover potential stress in their office loans. The bank said that its ratio of reserves to total office loans was about 10%, significantly above most of its peer banks.
The comparable figure is significantly smaller for New York Community’s much-larger multifamily loan book, where the allowance for loan losses was 1.3% of the portfolio. The bank has examined its top 250 multifamily loans, but it has yet to take an in-depth look at 64% of the portfolio.
Given how much of the multifamily loan book still needs to be reviewed, “I think there’s uncertainty there,” Peter Winter, an analyst at D.A. Davidson, said Wednesday.
The multifamily sector has been hit hard, particularly rent-stabilized buildings in New York City, where landlords’ ability to raise rents has been drastically hampered by a 2019 state law. The new rent restrictions come on top of far stronger eviction protections for nonpaying tenants, along with ballooning maintenance and insurance costs, said Seth Glasser, a New York City multifamily broker at the firm Marcus & Millichap.
The value of rent-regulated buildings in New York has been “annihilated,” Glasser said, with potential sale prices falling by 50% or more. Few potential buyers want the buildings since they have “no business model,” and few lenders would finance any deal, he added.
“There’s some really significant distress that continues to emerge,” Glasser said. “It feels like it’s getting worse every month.”
Otting noted that the buildings’ expenses have risen sharply, but he also said that the limited number of vacant apartments means the buildings have a “pretty solid” revenue stream.
New York Community believes the probability of defaults is rising, Otting said, but the multifamily portfolio so far “has held up very well” as borrowers keep making their payments.
Otting also expressed optimism that multifamily borrowers will remain relatively healthy even as their currently low interest rates reprice upward. So far, borrowers have been able to adjust to higher payments with “almost no delinquencies,” said Gifford, the bank’s CFO.
New York Community has brought on an experienced hand at managing loans that may fall into trouble. James Simons, who formerly ran loan workouts at U.S. Bank in Minneapolis, joined New York Community as a “special advisor to the CEO” to evaluate the health of its borrowers and whether it needs to set aside more reserves to cover potentially troubled loans, Otting said.
“The information is available to us,” he said. “We just need to formulate that information in the right way.”
The medium-term plan is to lower New York Community’s long-standing concentration in commercial real estate. The bank’s former chief executive, Thomas Cangemi, kick-started that journey with the 2022 acquisition of the consumer mortgage heavyweight Flagstar Bancorp in Troy, Michigan.
Just a few months after it completed the deal for Flagstar, New York Community acquired large portions of the failed Signature Bank. The acquisitions vaulted New York Community over $100 billion of assets, putting it into a category that prompts additional scrutiny from bank regulators.
During the lengthy process to acquire Flagstar, the company switched its primary federal regulator from the Federal Deposit Insurance Corp. to the Office of the Comptroller of the Currency. On Wednesday, Otting, who formerly led the OCC, said the company was “not ready to be regulated” by that agency.
“So we have a lot of catching up to do to get our standards up,” Otting said. “But we’re committed to doing that, and we’ve hired the people who understand what that looks like.”
The company’s diversification plan also covers its deposits. Otting said the bank is focusing on continuing to grow core deposits — part of its ongoing shift away from New York Community’s legacy model of funding multifamily loans with higher-cost certificates of deposit, which has included bringing in new depositors from Flagstar and Signature.
New York Community has recently lost some bankers to smaller rivals, including Peapack-Gladstone Financial and Dime Community Bancshares, raising the risk that departing bankers will bring customers’ deposits with them.
But the company’s deposits have stayed resilient after initial outflows in February, when its sharp stock decline prompted some depositors to leave. The bank started 2024 with $81.5 billion of deposits, a figure that dropped to $76.1 billion on March 7, when Mnuchin’s investment group announced plans to pump in new capital.
Deposits then fell slightly to $74.9 billion at the end of the first quarter, but they ticked up by $300 million as of April 29, according to company executives.
Hundreds of small and regional banks across the U.S. are feeling stressed.
“You could see some banks either fail or at least, you know, dip below their minimum capital requirements,” Christopher Wolfe, managing director and head of North American banks at Fitch Ratings, told CNBC.
The majority of those banks are smaller lenders with less than $10 billion in assets.
“Most of these banks aren’t insolvent or even close to insolvent. They’re just stressed,” Brian Graham, co-founder and partner at Klaros Group, told CNBC. “That means there’ll be fewer bank failures. But it doesn’t mean that communities and customers don’t get hurt by that stress.”
Graham noted that communities would likely be affected in ways that are more subtle than closures or failures, but by the banks choosing not to invest in such things as new branches, technological innovations or new staff.
For individuals, the consequences of small bank failures are more indirect.
“Directly, it’s no consequence if they’re below the insured deposit limits, which are quite high now [at] $250,000,” Sheila Bair, former chair of the U.S. Federal Deposit Insurance Corp., told CNBC.
If a failing bank is insured by the FDIC, all depositors will be paid “up to at least $250,000 per depositor, per FDIC-insured bank, per ownership category.”
Watch the videoto learn more about the risk of commercial real estate, the role of interest rates on unrealized losses and what it may take to relieve stress on banks — from regulation to mergers and acquisitions.
Of about 4,000 U.S. banks analyzed by the Klaros Group, 282 banks face stress from commercial real estate exposure and higher interest rates. The majority of those banks are categorized as small banks with less than $10 billion in assets. “Most of these banks aren’t insolvent or even close to insolvent. They’re just stressed,” Brian Graham, Klaros co-founder and partner at Klaros. “That means there’ll be fewer bank failures. But it doesn’t mean that communities and customers don’t get hurt.”
Enjoy complimentary access to top ideas and insights — selected by our editors.
The top five banks and thrifts in the ranking have combined total assets of nearly $13 trillion as of June 30, 2023. While many saw an increase in their assets over the previous year, one achieved a significant rise of 94.59%.
Scroll through to see which banks and thrifts are in the top 20 and how they fared in the 12 months ending June 2023.
KeyCorp’s optimistic forecast for 2024 represented a marked change from last year, when its focus was largely on balance-sheet restructuring and expense control.
Kim Raff/Bloomberg
KeyCorp Chairman and CEO Chris Gorman said the $187.5 billion-asset company is “clearly playing offense,” despite his view that the country is likely to fall into a recession.
High interest rates and market volatility have left a number of companies in a wait-and-see mode, Gorman said Thursday on a conference call with analysts.
“I am not seeing a lot of people making significant investments in property, plants and equipment, and I’m not seeing people make significant investments in inventory, in technology and in people,” said Gorman, who has led the Cleveland-based Key since May 2020. “Rates clearly have an impact [and] uncertainty as to the path and direction of the economy is also a factor.”
Against that cautious economic outlook, Key reported an outsize $101 million provision for loan losses, even after reporting only $81 million in charge-offs — 29 basis points of average loans — for the quarter ending March 31. Key also reiterated its full-year guidance, which envisions net charge-offs ranging from 30 to 40 basis points of average loans.
The $20 million reserve build “was completely proactive,” Gorman said on the conference call. “I am of the mindset that we are in [a] higher-for-longer” interest rate environment. “As a consequence, we have been stressing all of our portfolio.”
“My view is we probably will have a recession,” Gorman added.
Gormon’s comments match the tone set by JPMorgan Chase CEO Jamie Dimon, who said last week that chances of a tougher economy “are higher than other people think.”
Gorman’s prognosis for Key itself is considerably more optimistic than his macro outlook.
The company reported first-quarter net income of $183 million, driven by net interest income totaling $886 million. While the net interest income figure represents a 20% year-over-year decline, Key expects spread revenue to grow throughout the remainder of 2024, and to eclipse $1 billion in the final quarter of the year, beating the fourth quarter 2023 result by about 10%.
“We continue to confirm our ability” to reach that target, Chief Financial Officer Clark Khayat said on the conference call. “This first quarter of 2024 reflects the low point for net interest income.”
Net interest income, which is generally a bank’s largest revenue source, is calculated by subtracting funding costs from overall interest income.
Key’s forecast for 2024 represents a marked change from last year, when its focus was largely on balance-sheet restructuring and expense control. Gorman called 2023 a “reset” year for Key. Its 2024 outlook, by contrast, was well received by analysts.
“It looks like the story’s favorable drivers for the remainder of the year and beyond all remain intact,” Piper Sandler analyst Scott Siefers wrote in a research note.
Investor response on Thursday was muted. Key’s share price rose 3% by midday, though it yielded those gains as the day progressed. Shares closed down by 0.4% at $14.38.
Noninterest income was probably the brightest spot in Key’s quarterly report. At $647 million, it was up 6% year over year, driven by strong results in investment banking, wealth management and mortgages. Investment banking generated $170 million of revenue during the quarter ending March 31, with Gorman projecting as much as $650 million for all of 2024. “There’s no reason we can’t get back to that level of growth,” he said.
“I am encouraged by the strong, broad-based results we saw in our capital markets business,” Gorman said.
Key’s asset quality remains solid, despite upticks in net charge-offs and nonperforming assets, Gorman said. The company performed what he termed a “deep dive” on loans likely to be impacted the most in a higher-for-longer interest rate scenario, covering more than 80% of commercial non-investment grade credits.
The review determined that more than 90% of Key’s criticized commercial loans remain current in payments. It “confirmed our view that there would be low loss content in these loans,” Gorman said.
