Bank of America’s credit card losses hit their highest levels since before the pandemic in the first quarter, the company reported Tuesday.
Angus Mordant/Bloomberg
Though Bank of America’s profits dipped in the first quarter as it built a larger cushion for bad credit cards and office loans, bank executives are optimistic they’ve pulled the appropriate levers to manage credit going forward.
The Charlotte, North Carolina-based bank reported that its net charge-offs increased by more than 80% from the same period last year, from $807 million to $1.5 billion, as consumers struggled to pay off their credit card debt and turbulence in the commercial real estate sector continued. To manage the rising credit risk, Bank of America posted a $1.3 billion provision for credit losses, up from $931 million a year earlier.
“All of this is still well within our risk appetite and our expectations, and it’s consistent with the normalization of credit we’ve discussed with you in prior calls,” Chief Financial Officer Alastair Borthwick said Tuesday on the bank’s quarterly earnings call.
Bank of America reeled in net income of $6.8 billion last quarter, down from $8.2 billion in the first quarter of 2023, dampened in part by the credit-loss provision and a special assessment from the Federal Deposit Insurance Corp. related to bank failures last spring. The bank’s stock price fell Tuesday by 3.5% to $34.68.
The company provided more information about its exposure to office loans, which has been a hot topic among regional banks that tend to have bigger office loan portfolios. Bank of America has about $17 billion in office loans, which is just 1.6% of its loan book. Some 12% of the bank’s office loans were classified as nonperforming in the first quarter, while 16 loans were charged off.
Some $7 billion of the company’s office loans, or roughly 41% of its portfolio, are slated to mature this year. About half that figure will mature in 2025 and 2026, which implies the losses have been “front-loaded and largely reserved,” Borthwick said.
“We’re using a continuous and thorough loan-by-loan analysis, and we’re quick to recognize impacts in the commercial real estate office space through our risk ratings,” Borthwick said on the company’s earnings call. “As a result … we’ve taken appropriate reserves and charge-offs.”
Banks’ property loans have faced increased scrutiny in recent months, though most of the focus has been on regional lenders. Among the U.S. megabanks, Wells Fargo also reported an annual rise in charge-offs in its commercial real estate portfolio in the first quarter.
Bank of America’s bigger credit troubles last quarter, however, were in the consumer sector, which accounted for two-thirds of its credit losses. Credit card charge-offs hit a rate of 3.62%, their highest level since a decline during the COVID-19 pandemic, when consumers were buoyed by government assistance.
Over the next few quarters, it appears that BofA’s credit card losses may stay at existing levels, or even increase, said David Fanger, senior vice president of the financial institutions group at Moody’s Investors Service.
“Credit card losses are above pre-pandemic levels, and that’s somewhat unexpected,” Fanger said. “It’s not unique to Bank of America, but it’s certainly something that bears watching. It is a headwind. It is now contributing pretty significantly to their provisions in the quarter.”
Despite the rise in charge-offs, Fanger described the bank’s credit performance in the first quarter as “resilient.”
During the quarter, Bank of America logged relatively stagnant loan growth. High interest rates have not only tamped down loan demand, but they have also driven up the cost of deposits.
“Generally speaking, a higher-for-longer [rate environment] is probably better for banks,” he said. “The question will become, ‘Why are rates higher? What’s going on in the economy? Are we talking about inflation? Is it under control? Is it coming down?’” He went on to indicate that inflation does now appear to be under control.
Moody’s Fanger argued that Bank of America’s positive view of the interest rate outlook implies that the company doesn’t anticipate significantly more credit losses.
He also said that Bank of America’s net interest margin, which increased for the first time in four quarters, implies that the strain of higher rates on deposit costs is starting to steadily abate. The bank’s net interest margin of 2.5%, including global markets, was up from 2.47% in the fourth quarter of last year.
Joseph Otting, a former Comptroller of the Currency, took over as CEO of New York Community Bank on April 1. The Long Island bank is in recovery mode after pulling in a $1 billion investment led by former Treasury Secretary Steven Mnuchin.
Andrew Harrer/Bloomberg
New York Community Bancorp’s brand-new management team is seeking shareholder support for its $1 billion rescue, arguing they have a “clear vision for the future” and becoming a more resilient bank.
In documents filed ahead of a shareholder meeting, new CEO Joseph Otting acknowledged it will “take time and consistent results” to regain shareholders’ trust.
Otting, a former Comptroller of the Currency, stepped into the job April 1. His installment as CEO was part of the $1 billion investment led by former Treasury Secretary Steven Mnuchin, whose capital infusion helped restore confidence in New York Community after its stock price dove about 80% in a month.
As part of the deal, the $114-billion asset bank agreed to increase the number of shares it can issue to absorb its new investors. Though the capital infusion averted a more dire scenario, it massively dilutes existing shareholders’ positions, and some changes require their approval at the upcoming annual meeting. The Long Island-based company’s materials did not say when the meeting will take place, though it noted it will be virtual.
In a letter to shareholders, Otting wrote that the new team is doing everything it can to mitigate the hits New York Community has taken to its balance sheet recently, driven by stress in its hefty commercial real estate portfolio.
“We have a dedicated leadership team, a talented workforce, strong liquidity, and a clear vision for the future,” Otting wrote. “I believe we will emerge from this challenging period a more resilient, successful bank with a more diverse, balanced business model and a stronger risk management framework.”
New York Community, however, needs shareholder approval for a final rubber stamp on the deal because of the amount of stock it plans to issue.
The $1 billion and additional shares will boost capital levels, the company said, strengthening its position in the case of potential loan losses. While it’s unclear what losses New York Community may take going forward, bolstering its protection is a salient advantage, since its troubles were set off when it disclosed an unexpected $552 million loan loss provision in January.
Chairman Alessandro “Sandro” DiNello said on a call after the investment was announced that the capital will be sufficient to put the bank back on track.
“That’s why we raised capital, right?” DiNello said. “All the people that I’ve spoken to in the last month, the first question is always about credit. We want to put to bed the concern that we can’t handle whatever that might be.”
A chunk of the capital raise is happening through preferred shares, though the deal envisions converting them into common shares with shareholders’ approval. The bank noted that doing so would increase the type of loss-absorbing cushion regulators like best: common equity. If the conversions occur, the bank’s common equity tier 1 capital ratio would rise from 9.1% last year to 10.3%.
If shareholders don’t sign off on the deal, the company warned of negative impacts to its capital ratios and said it would be saddled with high dividends to preferred shareholders. New York Community also said in its proxy that, if the investment doesn’t win approval, the bank “would be severely limited in options should it need to raise capital.”
Bank consultant Bert Ely said the proposals seem prudent for the convalescing bank, adding that the proposals represent “corporate cleanup” work to give New York Community more flexibility if future issues arise.
“What they’re doing is preparing themselves for more pain,” Ely said. “Now, whether that’s going to be enough or not, who knows?”
He added that the actions also position the company better for a future acquisition.
Mnuchin and Otting reaped major gains the last time they partnered on a bank turnaround after the financial crisis. Mnuchin had led a group that bought IndyMac during a Federal Deposit Insurance Corp. auction. After installing Otting as CEO and rebranding the bank as OneWest, the two turned around the bank and sold it in 2015 to CIT Group.
While proposals related to the capital infusion make up the lion’s share of the proxy, the company also addressed some other housekeeping items subject to approval.
The bank is also asking shareholders to reapprove the accounting firm KPMG as its auditor, a role it’s held since 1993. New management has had to grapple with accounting-related questions and whether it had the proper controls in place for reporting financial metrics. The shortcomings raise concerns over whether KPMG flagged issues on time, though some experts note it’s hard to know what occurred behind the scenes.
KPMG said in its most recent audit that New York Community’s board of directors hadn’t exercised enough oversight, which led to ineffective risk assessment and monitoring.
The proxy statement also shed light on how the bank’s former CEO, Thomas Cangemi, would be compensated for last year’s performance. Cangemi, who resigned at the end of February, received just under $1.3 million in base salary in 2023. Upon leaving the company, Cangemi also forfeited unvested equity awards, the market value of which totaled nearly $9.5 million.
Additionally, New York Community disclosed it didn’t meet certain criteria to pay out short-term incentive awards, missing earnings per share thresholds and internal milestone progress.
New York Community has made a number of changes in the last two months to get back on track, including overhauling its board, packing its executive bench with risk management leaders, reassessing its loan-review process and portfolio and beefing up risk practice assessments.
“We believe our actions will be effective in remediating the material weaknesses, and we continue to devote significant time and attention to these efforts,” the company said in its annual report, released in mid-March.
Dan Rotta, a Brazilian-American businessman charged with dodging U.S. taxes for decades using accounts at Swiss banks including Credit Suisse, was granted a $15 million bail package on Tuesday. UBS Group AG, which now owns Credit Suisse, has said it’s cooperating with U.S. authorities on the case.
A Brazilian-American businessman charged with dodging U.S. taxes for decades using accounts at Swiss banks including Credit Suisse Group was granted a $15 million bail package on Tuesday.
Dan Rotta, 77, who was arrested March 9 at Miami International Airport as he prepared to fly to Barcelona, must remain under house arrest with electronic monitoring, a federal judge in Miami ruled. Prosecutors had sought to keep Rotta locked up, arguing he’s lied to the Internal Revenue Service for 35 years and has a motive to flee the U.S. before his trial on tax charges.
During the hearing in Miami federal court, prosecutors elaborated on their claims in an arrest complaint that Rotta had hidden more than $20 million from the IRS, using “pseudonyms, complicated corporate structures, and nominees” to conceal offshore assets and income. Rotta has a net worth of $38.5 million, prosecutors told the judge.
Even before Rotta’s arrest, the Justice Department was weighing whether Credit Suisse breached a 2014 plea agreement in which it paid $2.6 billion, admitted helping thousands of Americans evade taxes, and promised to identify other tax cheats. Rotta hid assets from the the IRS in two dozen secret bank accounts between 1985 and 2020, according to prosecutors.
Rotta must post 20% of the $15 million bail package or $3 million in cash, and he’s required to place a corporation holding nine properties in escrow, U.S. Magistrate Judge Jared Strauss ruled.
Rotta, a citizen of the U.S., Brazil, and Romania, relied on decades of deception, prosecutors said during the hearing. They said he lied to authorities, shifted money between himself and his cousin in Brazil, and used his passport from Brazil to avoid disclosing his U.S. citizenship to Swiss banks. Prosecutor Sean Beaty told a judge that IRS agents estimate Rotta owes at least $9.25 million in back taxes, $10 million in interest and $6.9 million for a fraud penalty.
IRS Special Agent James O’Leary, who wrote the arrest affidavit, also testified about the case against Rotta, who recently moved from Fisher Island, Florida, to Aventura. Rotta was charged with conspiring to defraud the U.S. and making false statements to the IRS. He faces as many as five years in prison on each count if convicted.
A spokesperson for UBS Group AG, which now owns Credit Suisse, didn’t respond to a request for comment. In a regulatory filing last month, UBS said: “Credit Suisse AG has provided information to U.S. authorities regarding potentially undeclared U.S. assets held by clients at Credit Suisse AG since the May 2014 plea. Credit Suisse AG continues to cooperate with the authorities.”
At the hearing, Rotta was shackled in a prisoner’s jump suit, accompanied by a U.S. marshal. He didn’t speak but whispered with his lawyers, jiggled his legs and occasionally shook his head while the government presented its evidence.
Prosecutors cited another Rotta brush with the law amid a rancorous divorce more than a decade ago. In 2012, a family court judge ordered him to take his 16-year-old son to a Utah boarding school. Instead, Rotta took him to Las Vegas to marry his housekeeper’s 18-year-old daughter, a move which legally emancipated the son. Rotta was convicted of contempt of court and ordered to serve 180 days in jail.
O’Leary’s arrest affidavit said that after public reports surfaced in 2008 that UBS was under investigation for helping U.S. taxpayers evade taxes, Rotta closed his account at the bank and moved assets to another Swiss bank. He was a client of Beda Singenberger, a Swiss financial adviser charged a decade ago with helping 60 people in the U.S. hide $184 million in secret offshore accounts with names like Real Cool Investments Ltd. and Wanderlust Foundation.
In the U.S. tax case, Rotta used entities like a British Virgin Islands corporation called Edelwiss Corporate Ltd. and the Putzo Foundation in Liechtenstein, according to the complaint. The IRS began auditing Rotta in 2011 after obtaining evidence he had unreported foreign financial accounts, and he denied owning them.
He claimed that hundreds of thousands of dollars in transfers from foreign accounts were nontaxable loans, and enlisted a cousin from Brazil to tell the IRS he made or facilitated the fake loans, the US said.
After the IRS assessed additional taxes and penalties against Rotta, he petitioned the U.S. Tax Court and denied having any foreign accounts. The cousin came to the U.S. to “retell the false loan story to IRS attorneys,” the U.S. said.
Rotta settled the Tax Court case with the IRS, which agreed he didn’t owe more taxes or penalties for 2008 through 2010, according to the affidavit. He also settled an audit with the IRS, which said he owed no more taxes or penalties for 2011 through 2013. Both were based on phony documents and fraudulent testimony, the US said.
In 2019, Rotta tried to make a voluntary disclosure to the IRS to limit his exposure to criminal prosecution and limit his exposure to a potential $10 million penalty. But his application was full of false statements, according to the complaint.
The case is US v. Rotta, 24-mj-2479, US District Court, Southern District of Florida (Miami).
Joseph Otting (left) is expected to become CEO of New York Community Bancorp after an investor group agreed to inject $1 billion of capital into the troubled company. Alessandro “Sandro” DiNello (right) will move back into his prior role as non-executive chairman.
Bloomberg
Joseph Otting, the newly appointed CEO of New York Community Bancorp, is confident that the ailing bank has a “fortress balance sheet” after getting a $1 billion lifeline.
A massive concentration in real estate loans continues to be an albatross, posing the risk that more capital could be needed to shore up the Long Island bank’s balance sheet. But as day one of the company’s new era came to an end, analysts were mostly optimistic that the duo of Otting and former Treasury Secretary Steven Mnuchin can succeed.
“There’s a lot of wood left to chop to turn the bank around for good,” David Smith, an analyst at Autonomous Research, said Thursday. “But I think there’s some hope among the investor base that has not really been there the last few weeks.”
The $114 billion-asset company was light on key details of its go-forward plan, with executives saying they will provide more information in next month’s earnings report, after the new management team gets a fuller grasp of the bank’s issues. Still, it was a far different picture from Wednesday, when the company’s survival appeared to be in question.
Mnuchin and Otting, two former Trump administration officials who earlier earned big returns from their turnaround of OneWest Bank, led the $1.05 billion investment into New York Community. The deal, which isn’t subject to regulatory approval, is slated to close Monday.
Some short-term actions are underway as Otting, the former Comptroller of the Currency, prepares to take the helm next month. The bank’s quarterly dividend,already slashed from 17 cents to five cents, will again be cut to just a penny.
A deep dive into the health of the firm’s loan portfolio, which has a large concentration in multifamily loans, including loans on rent-regulated apartment buildings in New York City, is ongoing.
A key question in the market now is whether $1 billion is enough to cover New York Community’s eventual losses. Alessandro “Sandro” DiNello, who has been leading the company since early February, said on a Thursday morning call with analysts that the capital raise will put the bank on track to “improve earnings and profitability.”
“That’s why we raised capital, right?” DiNello said. “All the people that I’ve spoken to in the last month, the first question is always about credit. We want to put to bed the concern that we can’t handle whatever that might be.”
The fresh capital restored at least some immediate confidence in the company following a month-long downward spiral in which its stock price fell some 80%.
Chris Marinac, an analyst at Janney Montgomery Scott, said Thursday that he thinks the capital was enough to set New York Community on the right track. He argued that the company could have gone without the capital raise from a financial standpoint, but it needed a show of confidence to settle investors. On Thursday, the share price climbed 5.8% to $3.66.
While the immediate issues seemed to have been quelled, some observers still see a possibility that the bank will eventually need more capital.
“That’s very much to be determined, because there are a lot of fundamental issues with that multifamily portfolio,” said Jeff Davis, managing director at Mercer Capital’s financial institutions group.
Chris Whalen, the chairman of Whalen Global Advisors and a New York Community stockholder, said the value of the bank’s apartment-related loans has dropped by a “mind-boggling” amount thanks to tougher rent regulations in New York state.
“One way or another, they’re going to sort this out,” Whalen said. But he argued that more aggressive action, such as an acquisition by a larger bank, may be needed.
The incoming management team indicated on Thursday that the future New York Community will look far different than today’s version.
The bank has long been concentrated in multifamily loans and other commercial real estate credit, even after recent acquisitions that added some diversification. Otting, who is a seasoned banker in addition to being a former top regulator, said he thinks the right mix of loans should be one-third each in three loan buckets: consumer, business and commercial real estate.
“My interpretation of today’s events is … they’re going to keep the company probably at a similar size,” Janney’s Marinac said. “Largely because the real task here is to diversify.”
New York Community’s $37.2 billion multifamily book, half of which was exposed to the rent-regulated real estate market as of the end of last year, has been a core source of investor concern as declining property values and rising interest rates have made the loans riskier.
However, Otting and DiNello said that they aren’t overly worried about New York Community’s loans in the rent-regulated sector. DiNello explained that though the riskiness of those assets has increased — about 14% of the loans were categorized as being at risk in the company’s latest earnings report — there aren’t any delinquencies in the portfolio.
Borrowing JPMorgan Chase CEO Jamie Dimon’s turn of phrase, Otting and DiNello said the capital infusion helps establish a “fortress” balance sheet that provides a cushion against credit blips. But it will come at a cost to existing shareholders, since the equity outstanding in the company will double, diluting the current owners’ positions.
New York Community shareholders have long been expecting that a capital raise will lead to major dilution, said Davis of Mercer Capital. Many bank investors faced similar situations back in 2008 and 2009.
“The more [capital] you raise and the lower the price, the more dilution there is, and the more the current price has to go down to factor that in,” Davis said. “This is how it should be. The common shareholders, the existing ones, are absolutely creamed.”
Beyond the financial benefits, this investment group’s decision to inject new capital and appoint a new management team is a boon to the stock, said Autonomous Research’s Smith.
Still, after the company’s $552 million loss provision in the fourth quarter shocked the market, it’s unclear how much New York Community will need to set aside for risky loans moving forward.
The bank also needs to revamp its risk management after disclosing weaknesses in its internal controls last week. The compliance mea culpa came after the OCC became New York Community’s primary regulator, and recent acquisitions pushed it past the $100 billion-asset mark that triggers more stringent oversight.
Otting, the former head of the agency that is now the bank’s primary regulator, said that shrinking the bank’s assets under $100 billion is an option, but that the bank isn’t ready to make a decision.
“We will come back with the vision of the way we see the future of the bank,” Otting said. “We just need a little bit more time to be able to do that.”
The company disclosed Thursday that its deposits fell by 7% in the last month. Its leaders argued that the losses were relatively small in light of the headline-grabbing stock price declines.
DiNello said that after “everything this company has been through over the last two months,” the fact that there wasn’t more deposit outflow is an indication of resilience.
Although Fitch Ratings and Moody’s Investors Service both recently downgraded New York Community to below investment grade, DiNello said the bank was able to get waivers from the agencies to keep holding custodial deposits, which otherwise could have gone elsewhere because of restrictions on the ratings of the banks that can hold them.
Otting added that the company intends to accelerate conversations with the ratings agencies this month to see whether the influx of capital justifies upgrades to the company’s credit ratings.
DiNello, who’s taking back his former role of non-executive chairman, said that the bank will aim to be transparent during its first-quarter earnings call in April, after management has had a couple of months to evaluate the situation.
“These capital deals come together very quickly,” DiNello said Thursday. “To think that we could possibly come to you today and say, ‘Hey, here’s how everything is going to be going forward,’ that would be unrealistic. The key thing is that we’ve got the capital in place, and now we can, in fact, put together a strategy that makes sense.”
The recent turmoil at New York Community Bancorp is raising more questions about its auditor KPMG, which last year faced scrutiny over its audits of three now-defunct regional banks.
KPMG has built up a large business auditing U.S. banks and had long audited Long Island-based New York Community. The bank’s stock is down nearly 70% this year after a series of disclosures that have troubled investors. Last week, it replaced its CEO, filled leadership vacancies in its internal risk and audit departments and disclosed weaknesses in internal controls over its financial reports.
The latter disclosure seemingly conflicts with an audit KPMG performed in 2022, when KPMG said the bank’s internal controls were effective.
The facts over KPMG’s audits aren’t public, making it hard to gauge whether auditors rightfully pushed back as New York Community quickly grew in 2023. But the bank’s disclosures of weaknesses are the latest headache for KPMG, which audited all three of the regional banks that failed last year: Silicon Valley Bank, Signature Bank and First Republic Bank.
“There’s no excuse for it,” said Francine McKenna, a former KPMG consultant whose The Dig newsletter focuses on accounting issues.
Debates over KPMG’s audits of those three banks — and now, the struggling New York Community — center around whether auditors are to blame for poor decision-making by the banks, or whether the blame lies solely on CEOs. A full answer on that question is not yet clear, but all four cases highlight the perils of rapid growth.
When growing quickly, banks’ risk management and financial reporting effectiveness must “keep pace with their growth in assets,” said Kiridaran Kanagaretnam, a professor at York University in Canada who researches bank accounting.
KPMG did not comment on the issues at New York Community. In a statement, KPMG spokesman Russ Grote said the firm has “long had a substantial and dynamic audit practice in the financial services industry.”
“We conduct our audits in accordance with professional standards, maintaining auditor independence. Due to client confidentiality, we have no specific comment,” the KPMG spokesman said.
Spokespeople at New York Community did not respond to requests for comment.
The three regional banks that failed last year were all darlings of bank investors who preferred high-growth banks. New York Community long took a more old-fashioned approach, having bulked up mostly through a series of smaller mergers in the 2000s.
In a securities filing last week, New York Community said that it had “identified material weaknesses” in its internal controls for loan reviews, citing “ineffective oversight, risk assessment and monitoring activities.”
The company also delayed the release of its annual report, saying it’s “been working diligently to finalize” it but must first complete its review of the issue. The company said it expects its annual report to state that its internal controls over financial reporting “were not effective” at the end of 2023 and lay out a “remediation plan” to fix those weaknesses.
The bank’s issues highlight the need for the “strictest controls and auditing” for retail-focused banks since they handle everyday depositors’ money, said Atul Shah, a professor at City University of London. Shah wrote a book about auditors’ shortcomings before the 2008 financial crisis and has argued for a stronger government role in auditing.
“Aggressive CEOs who wish to grow the numbers very fast will despise controls and favour risky assets,” Shah said in an email. “This has to be checked in time and regulated.”
One potential explanation for New York Community’s problems in 2023 is the difficulty of integrating Flagstar Bank and the chunks of Signature Bank all within one system, said Jack Castonguay, an accounting professor at Hofstra University.
In 2022, New York Community’s loan portfolio was entirely its own, but last year the company absorbed two other sets of loan books that “may not be structured” the same.
“It’s kind of like if all your devices have lightning chargers, and then you have a USB-C phone,” Castonguay said.
KPMG may also have found the same weaknesses as it looked at the bank’s books from last year, though that information is not public yet, Castonguay noted.
Last year, Castonguay wrote an op-ed arguing that while scrutiny of auditing processes is warranted, the failures of Silicon Valley, First Republic and Signature banks may have been solely due to “poor management” rather than anything within an auditors’ control.
Others, such as McKenna, have been far more critical and argued the failures reflect auditors failing to take a hard look at all the assumptions that make up a bank’s financial statements. McKenna also criticized the “revolving door” between KPMG and bank leadership, noting the CEOs of both First Republic and Signature both held top roles at KPMG.
“It seems like we’ve got a little cottage industry in audit partners thinking they can run banks,” McKenna said. “And clearly, they’re not doing a very good job.”
New York Community recently replaced CEO Tom Cangemi, who worked at KPMG for a few years after college but did not become a partner there — since he instead took on chief financial officer roles at banks.
Cangemi, who was the architect of the bank’s recent growth, did not respond to a request for comment.
Yet one entity that came under scrutiny for lending billions to failed banks last year also reaped billions in profits from the regional bank crisis, a dichotomy that has critics up in arms.
The Federal Home Loan Bank System earned $6.7 billion at year-end, a 111% jump from a year earlier. The system also paid out a record $3.4 billion in dividends to its members, more than double the $1.4 billion paid in 2022.
Critics are pointing to the system’s combined operating highlights, released last month, to raise fresh concerns about whether the Home Loan banks are providing a public benefit that is commensurate with the profits paid to members.
“Numbers don’t lie,” said Sharon Cornelissen, director of housing for the Consumer Federation of America, who chairs the nonprofit Coalition for FHLB Reform, a group of academics, housing advocates, regulators and Home Loan bank alumni seeking to reform the 91-year-old system. “The numbers show that the Home Loan banks continue to prioritize the profitability of their members over their mission of promoting affordable housing.”
Each of the 11 regional Home Loan banks is required by statute to give 10% of earnings to affordable housing, an assessment that comes to $752 million for 2024. The banks expect to contribute roughly $1 billion toward its Affordable Housing Program and voluntary programs in 2024, a spokesman said. The amount paid to affordable housing rises and falls based on the system’s profitability.
“Dividends are reflective not only of the extent to which members rely on the liquidity we provide, which expands and contracts based on member needs; they represent a return on investment that our members pour back into housing finance and other financial services for their local communities,” Ryan Donovan, president and CEO of the Council of Federal Home Loan Banks, said in a statement.
The collapses of Silicon Valley Bank, Signature Bank, First Republic Bank and Silvergate Bank called into question the dual role of the Home Loan banks in providing liquidity to their members while also supporting housing. The Federal Housing Finance Agency, the system’s regulator, was already conducting a 100-year review of the system when the deposit run on Silicon Valley Bank sparked a liquidity crisis that spread last March across the entire banking system.
Many experts are waiting for the FHFA to make its next move toward reforms by releasing an expected rule that would define the system’s mission, which has become the subject of much debate.
In November, the FHFA released a report with 50 recommendations for reform. FHFA Director Sandra Thompson has said that maintaining the status quo “is not acceptable.”
Dividends have received renewed focus after the Yale School of Management’s Program on Financial Stability released a report in January that recommended redirecting the system’s dividends toward housing and away from what its researchers called “subsidized borrowing” for banks.
Steven Kelly, an associate director of research at Yale’s Program on Financial Stability, said the Home Loan banks’ dividend practices should be better aligned with the system’s housing goals.
The Home Loan banks have a unique structure of both membership and activity-based stock. Members are required to hold nominal amounts of stock but when a bank member taps the system for advances, the loan is used to purchase additional stock, typically 4% to 5% of the loan amount.
“The dividends reward process would be an easy prong to refocus on affordable housing,” Kelly said.
In the past year, the Federal Home Loan Bank of New York raised its dividend to 9.75%, the highest among the 11 banks, followed by Federal Home Loan Bank of Topeka at 9.5%. The Topeka bank garnered attention recently after lending $21 million to Heartland Tri-State Bank, in Elkhart, Kansas, whose former CEO Shan Hanes was indicted for allegedly embezzling funds last year to buy cryptocurrency. Heartland, which failed in July 2023, provides yet another example of troubled banks tapping the system prior to collapsing.
“Most [Home Loan banks] pay a much higher dividend on activity stock because they want to encourage members to borrow more,” said Peter Knight, a former director of government relations for nearly 20 years at the Federal Home Loan Bank of Pittsburgh, who is also a member of the Coalition for FHLB Reform.
There is little public data on the interest rates the Home Loan banks charge and whether the rates on advances are comparable to — or cheaper than — borrowing from the Federal Reserve’s discount window, which has become an issue in the larger debate about reforming the system.
Knight noted that in February, the Federal Home Loan Bank of Chicago touted its higher dividends for helping its members lower their borrowing costs.
“The net benefit of the higher dividend received on Class B1 activity stock has the effect of lowering your borrowing costs from us,” the Chicago bank said in a press release. “This benefit is estimated to be a 14.9 bps interest rate reduction.”
The Home Loan banks are a government-sponsored enterprise whose debt receives an implicit government guarantee. Some critics say that more of the system’s profits should go toward its housing mission because the banks receive cheap funding from the implied guarantee that the government would step in in the event of a default.
“The FHLBs are getting this advantage by being able to issue debt that is treated as government debt, and then go out and do risky things with it,” said Kelly. “To transform something that’s risky, namely lending to banks on the asset side, into something that’s risk-free, namely government-backed liabilities on the liability side, is a significant advantage.”
The system says that any effort to change dividends would have an impact on the ability of community banks to tap the system’s low-cost funding to make payroll, smooth out earnings and stay in business.
“Without these dividends — which is the only return on the capital paid in by our members — many local community lenders would not be able to provide mortgages and small-business loans in thousands of communities across the country,” Donovan said.
New York Community Bancorp’s latest leadership revamp did little to quell investors’ worries about the Long Island-based bank, as its stock price fell nearly 26% after a flurry of announcements that started late Thursday.
The company said early Friday that it has filled gaps in its executive ranks by hiring a new chief risk officer and a head auditor. The appointments are part of the bank’s efforts to fix “material weaknesses” in its internal controls, which New York Community disclosed publicly the day before.
The hirings of George Buchanan as chief risk officer and Colleen McCullum as chief audit executive fill two vacancies that had been a source of concern for investors. But New York Community’s disclosures about internal control weaknesses and an announcement that it is delaying the release of its annual report sparked new worries.
On Friday, Fitch Ratings cut its rating of New York Community to BB+, moving it into “junk” or speculative territory.
Fitch analysts wrote in a note that the new hires are “constructive steps in building an executive team with depth of experience more in line” with a bank its size. But they stated that the material weaknesses prompted a “re-assessment of NYCB’s risk profile.” And they warned that the bank may see its profitability hampered if it further ramps up its reserves, which guard against losses in its real estate-heavy loan portfolio.
Moody’s Investors Service also cut the bank’s rating to B3, deeper into junk territory. In a note on Friday night, the ratings firm said the bank’s overhaul is coming during a “particularly challenging” environment and flagged “ongoing risks to its creditworthiness” as the bank’s changes take full effect.
Piper Sandler analyst Mark Fitzgibbon, who downgraded the bank’s stock rating late Thursday from “overweight” to “neutral,” said the leadership changes and delayed annual report imply that New York Community may not be past its woes.
Investors are “sniffing around trying to find bargains” in the banking sector and wondering whether the hard-hit New York Community is a good candidate, Fitzgibbon said.
The bank’s stock price is now hovering at levels last seen during the Clinton administration. But Fitzgibbon said its problems are “very opaque,” making it hard for investors to predict whether there’s more pain to come.
“Everybody thought they had ripped the Band-Aid off three or four weeks ago,” Fitzgibbon said in an interview. “Now it appears that’s not the case, and that there’s more to come.”
The bank’s disclosures late Thursday also raised new questions about New York Community’s auditor, KPMG. The accounting giant, which is the leading auditor of U.S. banks, has faced criticism following the failures last spring of Silicon Valley Bank, Signature Bank and First Republic Bank, all of which KPMG audited.
In an annual filing last year, New York Community said that KPMG had audited the effectiveness of its internal controls as of year-end 2022. The next year was a busy one for New York Community, as it folded in Flagstar Bancorp’s operations and also acquired much of Signature’s remains.
On Thursday, New York Community blamed the “material weaknesses” in its internal controls on “ineffective oversight, risk assessment and monitoring activities.” It said that the weakness related to how the bank reviews loans internally.
The bank also said that it has discussed the issues it disclosed Thursday with KPMG and that a full review of its internal controls is ongoing.
New York Community said that it expects to announce in its annual report that “its disclosure controls and procedures and internal control over financial reporting were not effective” at the end of 2023. It also said it would lay out a “remediation plan” to fix the weaknesses.
“There are a lot of questions that the auditors are going to have to answer,” said Dennis Kelleher, the co-founder and CEO of the advocacy group Better Markets.
A KPMG spokesperson declined to comment. New York Community did not respond to a request for comment on the issue.
The latest news from New York Community “will once again test customer loyalty and deposit stickiness given this new round of stock price pressure,” analysts at the ratings firm Morningstar DBRS wrote in a research note.
Shares in the bank fell 25.9% after Thursday’s disclosures and ended Friday at $3.52 per share, down sharply from roughly $10 per share at the start of the year.
“Unfortunately, these additional news items place further scrutiny on the company at a time when it needs to restore confidence,” the Morningstar DBRS analysts wrote.
A little over four weeks ago, New York Community announced a fourth-quarter earnings loss and dividend cut that shocked investors and sank the company’s stock price by nearly 40% in a single day.
A week later, Alessandro “Sandro” DiNello, the former Flagstar CEO who had been New York Community’s non-executive chairman, was named executive chairman. That appointment appeared to represent a demotion for New York Community CEO Thomas Cangemi. On Thursday, the bank said that Cangemi was out as CEO, with DiNello adding that title.
Buchanan, the new chief risk officer, previously led credit review and risk management at Regions Bank. McCullum, who was named chief audit executive, arrives from United Community Bank. Earlier in her career, she headed audit and risk teams at Capital One Financial, Wells Fargo and Bank of America.
Those additions were part of an 18-hour stretch of musical chairs in the bank’s executive ranks and on its board.
While Cangemi is remaining on the company’s board, New York Community also announced Thursday that board director Hanif “Wally” Dahya has left his position. Dahya wrote in his resignation letter that he “did not support the proposed appointment of Mr. DiNello as president and CEO of the company.”
Dahya’s departure came less than a month after the resignation of another director, Toan Huynh, who walked away on the same day that DiNello was named executive chairman.
Also on Thursday, Marshall Lux, who joined the board two years ago, was named “presiding director” of the board and chair of its nominating and corporate governance committee.
On Friday, DiNello touted the progress he’s made since taking a more hands-on role.
“Over the last three weeks since being appointed as executive chairman, the company has taken swift action to improve all aspects of our operations,” DiNello said Friday in a prepared statement. “The leadership team identified the material weaknesses disclosed yesterday and has been taking the necessary steps to address them, including appointing new executives.”
The $116.3 billion-asset company’s new leaders will have to steady an outsized commercial real estate portfolio, fix the newly disclosed weaknesses in the company’s controls and contend with its lowest stock price since 1997.
Wedbush analyst David Chiaverini, who downgraded New York Community twice back in November, landing at “underperform,” wrote in a Friday note that the bank’s internal review could lead to additional loan loss reserves. Such reserve building would be aimed at protecting against losses in the bank’s massive real estate portfolio, especially rent-regulated properties that have come under pressure due to high interest rates and new limitations on rent increases, Chiaverini said.
DiNello said in his statement Friday that the bank’s existing allowance for credit losses accounts for the weaknesses, and isn’t expected to change. The Morningstar analysts wrote that they didn’t view the company’s latest announcements as indicative of new issues.
During Cangemi’s tenure as CEO, New York Community made two acquisitions in quick succession that vaulted the bank to more than $100 billion of assets, which brought a higher level of regulatory scrutiny. The company bought Flagstar in late 2022 and acquired parts of Signature after the crypto-friendly institution failed last year.
The bank’s new leadership team is inheriting a challenging situation, Kelleher said.
“Hopefully, this new management and board will be able to stabilize the bank, but no matter how good they are, they still have to deal with an incredibly burdened balance sheet,” he said. “All the internal controls, the loan book, the CRE problems and on and on are still there.”
Alessandro “Sandro” DiNello spoke Wednesday about the turnaround of Flagstar Bancorp. “It took 10 years to do that, but we got it there,” the former Flagstar CEO said. “And if you do it the right way, you do it gradually, and you don’t try to do things too quickly, and you keep safety and soundness in the forefront, it can be done.”
When Alessandro “Sandro” DiNello spoke to analysts early Wednesday morning, less than an hour after being announced as executive chairman of New York Community Bancorp, one of the first points he made was about his experience in navigating tricky regulatory matters.
DiNello served as CEO of Flagstar Bancorp from 2013 until its 2022 acquisition by New York Community. During that nine-year stretch, Flagstar contended with numerous regulatory issues that had emerged from the 2008-2009 mortgage crisis.
“We were a monoline mortgage company that had been decimated by the Great Recession,” DiNello said Wednesday, recalling his time at Michigan-based Flagstar. “That was a difficult time, but we made our way through it by building the right team, building a strong risk and compliance framework, and by building the right business model.”
Later in the call, DiNello, a 1975 graduate of Western Michigan University, noted that he started his career as a bank examiner.
On Jan. 31, the bank announced a net loss of $260 million in the fourth quarter, driven by a large reserve increase. It also cut its dividend by 70%, which executives said was necessary to build capital. The company’s stock price fell by 59% over the following week.
Industry observers believe that the bank’s regulators were likely responsible for the surprise bad news, though New York Community has been tight-lipped about what happened.
The same day the earnings report was released, Jefferies downgraded New York Community’s stock from “buy” to “hold,” citing an “unexpectedly faster regulatory mandate” to comply with regulations for larger banks.
It now falls largely to DiNello to navigate the choppy waters ahead. While Thomas Cangemi is still New York Community’s president and CEO, it was DiNello who answered most of the questions from stock analysts on Wednesday. He made the case that he has the right skills and experiences to engineer a turnaround of the $116.3 billion-asset bank.
Early in his career, DiNello worked at Jackson, Michigan-based Security Savings Bank, which was acquired in 1994 by a bank that later became Flagstar.
Over the following decades, DiNello’s roles included leading government affairs for the bank. He also served as head of branch banking, an experience that he suggested will be useful in his new role at New York Community.
“I built the Flagstar branch network. These people know how to take care of customers,” DiNello said Wednesday on the conference call, adding that New York Community’s front-line bankers have a similar rapport with their clients.
“And because of that, we have seen virtually no deposit outflow from our retail branches,” he said just hours after New York Community released an update on its deposits in an effort to convince investors that its funding was still solid.
When DiNello became Flagstar’s CEO in 2013, he took over from a predecessor who’d lasted only eight months in the job. Flagstar, which was largely a mortgage lender, was in a tough spot. Between 2007 and early 2012, the company had lost nearly $1.4 billion.
In 2010, Flagstar entered into a supervisory agreement with the Federal Reserve that required the bank to submit an annual capital plan and receive a written non-objection from the Fed before paying a dividend or repurchasing stock.
Then in October 2012, the lender entered into a consent order with the Office of the Comptroller of the Currency, which related to its regulatory capital, enterprise risk management and liquidity, among other matters.
There was more regulatory trouble ahead. In September 2014, the Consumer Financial Protection Bureau ordered Flagstar to pay $37.5 million in fines and restitution in connection with allegations that it blocked homeowners from receiving foreclosure relief.
But over time, Flagstar’s crisis-era regulatory headaches got resolved. The OCC consent order was lifted in December 2016. Nearly two years later, so was the Fed’s supervisory agreement.
Flagstar’s financial results also showed gradual improvement during DiNello’s time at the helm. Its net interest margin was under 2% when he became CEO, DiNello said Wednesday, but it rose to around 4% by the time the bank was acquired.
“It took 10 years to do that, but we got it there,” DiNello said. “And if you do it the right way, you do it gradually, and you don’t try to do things too quickly, and you keep safety and soundness in the forefront, it can be done.”
Between 2015 and 2020, Flagstar recorded net income of more than $1.3 billion, including $538 million during the first year of the COVID-19 pandemic, as the U.S. mortgage market boomed.
During Flagstar’s quarterly earnings call in January 2021, DiNello described 2020 as the most successful year in the company’s history. Three months later, New York Community announced plans to buy Flagstar in an all-stock deal valued at roughly $2.6 billion.
A month before the deal was announced, Flagstar resolved one last crisis-era regulatory matter. The bank settled its obligations under a 2012 settlement with the Department of Justice, which related to false certifications on government-backed loans that went bad. Flagstar agreed to pay $70 million, which was $48 million less than it had originally appeared to owe.
When the New York Community acquisition closed in December 2022, DiNello became the combined company’s nonexecutive chairman. The events of the last two weeks have pushed into more of a day-to-day leadership role.
Since New York Community’s tailspin began, DiNello and other executives have been buying shares in the company. The purchases are similar to those made by regional bank CEOs last spring, as they sought to reassure investors they thought their banks were sound.
On Friday, DiNello bought more than $200,000 of shares, according to a securities filing. The company’s stock rose 17% after the disclosure of the executives’ stock purchases.
While Friday’s insider stock purchases instilled some “calmness,” showing that deposits are stable or growing will be key, said Peter Winter, an analyst at D.A. Davidson.
“It’s all going to come down to deposits — it really is,” Winter said. “If they come out with a midquarter update, and deposits are down, the stock is going to sell off.”
Christopher McGratty of Keefe, Bruyette & Woods is among the analysts who have welcomed DiNello’s new role. He wrote in a research note that DiNello was “the architect” of Flagstar’s operation and regulatory restructuring.
“DiNello has a strong reputation of turning around Flagstar Bancorp,” McGratty wrote, adding that the executive’s direct communication during Wednesday’s conference call, which included owning up to the challenges facing New York Community, should help start to restore confidence.
“He is well known to the Street, and his experience working through these matters should help NYCB, in our view,” McGratty added.
Some of the challenges that New York Community faces revolve around meeting the expectations that regulators have for banks with more than $100 billion of assets — a threshold that the bank crossed when it bought parts of the failed Signature Bank last spring.
During Wednesday’s call, DiNello spoke about the company’s plans to reduce its commercial real estate concentration, sell nonstrategic assets and build capital. In other forums, he has spoken about his leadership traits.
“I am willing to take risks — calculated ones,” he said in a 2017 interview with the Detroit Free Press. “If you are smart about the risks you take and you do so in a disciplined fashion, it works out.”
Daniel Tamayo, an analyst at Raymond James, said that DiNello proved to be a capable leader at Flagstar during a challenging time for the bank.
“I remember thinking, when I picked up coverage of Flagstar, ‘Why would they have someone that was there when it almost went under to lead them out of it?’” Tamayo said. “DiNello ended up being the perfect guy for the job.”
Tesco on Friday said it was selling the retailing banking business of Tesco Bank to Barclays for £600 million initially, and then another £100 million after the settlement of certain regulatory capital amounts and after transaction costs.
The U.K. supermarket chain said it will use majority of a combined £1 billion, which also includes a special dividend previously announced from Tesco Bank, for a share buyback.
It will retain insurance, ATMs, travel money and gift cards, that on a proforma basis account for roughly £80 million to £100 million in operating profit, and said the deal is mildly accretive to earnings per share.
Barclays said it’s acquiring credit cards, unsecured personal loans, deposits and the operating infrastructure that includes £8.3 billion of unsecured lending balances with a credit quality consistent with its existing U.K. portfolios. The business it’s buying had an adjusted operating profit of approximately £85 million in the 12 months ended February 2023.
Barclays also will enter into an exclusive strategic partnership with Tesco for an initial period of 10 years to market and distribute credit cards, unsecured personal loans and deposits using the Tesco brand, paying £50 million per year.
Tesco TSCO, +0.89%
shares have dropped 3% this year while Barclays BARC, -1.02%
shares have declined by 7%.
New York Community Bancorp, which had $116.3 billion of assets at the end of last year, grew substantially through its acquisitions of Flagstar Bancorp and the failed Signature Bank.
Bloomberg/Adobe Stock
Nearly a week after New York Community Bancorp’s fourth-quarter earnings report triggered a substantial decline in the company’s stock price and deepened a sense of wariness about its loan portfolio, industry observers are now watching for signs of deterioration in its deposit base.
They’re also wondering who’s overseeing the enterprise risk management function at the Hicksville, New York, company, which nearly doubled in size over the past 16 months.
A spokesperson for New York Community — which crossed the $100 billion-asset threshold in late March 2023 when it acquired large chunks of the failed Signature Bank — confirmed Monday night in an email that Nicholas Munson, the company’s chief risk officer since 2019, left “in early 2024.”
Munson’s departure, which was first reported by the Financial Times, leaves a significant leadership gap that may exist for a couple of months, said Clifford Rossi, former chief risk officer for Citigroup’s consumer lending division.
How long the chief risk officer job is open depends on how quickly New York Community can identify, interview and vet qualified candidates, and then ultimately hire someone, he said.
Finding the best candidate as quickly as possible is paramount, said Rossi, who is now a professor at the University of Maryland School of Business.
“This is not some officer buried in the hierarchy,” Rossi said Tuesday. “This is the most senior risk officer in the organization, so it’s important for the bank to put a person in that place, and it’s important for regulators to see that they are putting someone in place.”
Munson joined New York Community in 2018 as its chief audit executive, according to a biography that has since been removed from the company’s website. As the chief risk officer, he was responsible for “designing, implementing and maintaining an effective risk management program that aligns to applicable regulatory guidance and is commensurate with the company’s size, scope and complexity,” the biography read.
It’s unclear whether Munson left of his own accord, whether company executives were somehow dissatisfied and felt the need to seek someone more familiar with overseeing risks at a larger company or whether regulators pushed the bank to make a change.
It’s also unclear who is currently overseeing risk management operations at New York Community. The company’s spokesperson declined to say if someone has temporarily taken over the duties of the C-suite level role or how the organization plans to fill it on a more permanent basis.
Some analysts believe that the bank will move quickly to find someone new.
“They’re going to hire a chief risk officer in no time, there’s no doubt,” said Casey Haire, an analyst at Jefferies. “I don’t know why [Munson] left, but rest assured they’ll be looking.”
Haire pointed out that New York Community’s 2024 expense guidance calls for an estimated $80 million increase in spending earmarked for annual compensation and benefits. Altogether, the bank expects to hike spending by $265 million, including costs related to becoming a so-called Category IV bank, which has $100 billion to $250 billion of total consolidated assets.
Silicon Valley Bank left the chief risk officer position unfilled for eight months, during which time the bank and its parent company, SVB Financial Group, grappled with a host of risks, such as rising interest rates, insufficient liquidity and the impacts of a slowdown in the venture capital marketplace.
New York Community’s situation is different, since the risk chief position was only recently vacated.
“It’s not like they were flying blind,” said David Chiaverini, an analyst at Wedbush Securities.
New York Community, which had $116.3 billion of assets at the end of December, months after joining the more heavily regulated tier of banks with at least $100 billion of assets, has been on a roller-coaster ride for the past week.
Last Wednesday, it reported a quarterly net loss of $260 million, driven by a large reserve build to protect against souring loans. The company also surprised Wall Street by slashing its dividend by 70% — from 17 cents to five cents — a move that executives said was necessary in order to build capital.
Those unexpected moves came at a time when analysts were already on alert about New York Community’s exposure to both office loans and rent-controlled multifamily loans, and they contributed to a sharp decline in the bank’s stock price. Shares fell 37% last Wednesday, and they have fallen by double digits on four of the last five trading days.
The stock closed Tuesday down more than 22% from the prior day’s close, and down more than 59% from a week ago.
After the market closed, Moody’s Investors Service downgraded New York Community’s long-term issuer rating by two notches, citing myriad headwinds.
In the past week, Jefferies and Compass Point Research & Trading have both downgraded the bank’s shares. On Friday, Fitch Ratings also downgraded the stock, saying in a note that the “timing of the announced actions” to meet the prudential standards for Category IV banks, as well as the size of the credit provisions, were “outside of Fitch’s baseline expectations.”
The lower the stock price sinks, the greater the chances that depositors will get spooked, Chiaverini said. In November, he downgraded shares in New York Community on two occasions, citing ongoing concerns about its “outsized [commercial real estate] exposure in a higher-for-longer rate backdrop” as well as its “sizable exposure” to New York City’s rent-regulated multifamily lending market.
“Now that the stock has taken a dive … there’s fear, and the key concern now is retaining their deposits,” Chiaverini said Tuesday. Some 36% of New York Community’s deposits are uninsured, he noted. If those uninsured funds go elsewhere, the bank will have to make up for them with borrowings, which are expensive and have a negative impact on the bank’s net interest margin.
In the past week, New York Community has not provided an update to investors about its deposit volume. But analyst Ebrahim Poonawala of Bank of America Securities said in a research note Monday that “feedback from management indicates that the bank is not seeing any unusual deposit inflows or outflows.”
Poonawala also noted that New York Community, through its Flagstar Bank subsidiary, has a “significant retail branch footprint, aiding its ability to raise retail deposits.”
Mark Fitzgibbon, an analyst at Piper Sandler, wrote in a note to clients that New York Community described its deposits situation on Tuesday as “business as usual.”
“We interpret this to mean that there is no meaningful deposit pressure,” Fitzgibbon wrote. “While it would be natural for the company to see a few customers react to last week’s headlines and diversify some funds, we do not think the company wants to be in a position of discussing deposit flows each day; hence their comments. We have also been scouring social media for any hints of short sellers trying to exert deposit pressure on the company and have not found anything too worrisome.”
Deposits totaled $81.4 billion as of Dec. 31, 2023, a decline of 2% from the prior quarter.
Several banks that were experiencing deposit outflows last spring issued updates about their deposits, but Chiaverini said there’s reason to be cautious about that approach.
“There’s a debate as to whether putting out an interim update does more harm than good,” Chiaverini said. “Those banks that provided more frequent updates last year, it didn’t seem to help during the height of the chaos” that was sparked by Silicon Valley Bank’s failure.
Banks are in wait-and-see mode about how quickly net interest margins can be rejuvenated now that Fed Chairman Jerome Powell says three rate reductions are on the table for 2024 — but that the first is unlikely to be in March as the markets had once hoped.
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A resilient economy and continued strong employment gains could persuade the Federal Reserve to keepinterest rates elevated for longer — stymieing hopes for cuts this spring and keeping pressure on banks’ deposit costs and their collective ability to grow their loan portfolios.
The one-two punch of slower lending and higher funding expenses crimped many banks’ net interest margins and, by extension, fourth-quarter profits. Bankers said during earnings season in January and early this month that theyanticipated more favorable conditions in the year ahead, assuming rates at least start to come down and deposit costs follow suit. Lower rates would also decrease borrowing costs for banks’ customers, opening a door forstronger loan demand and increased income.
The $61 billion-asset Valley National in New York, for example, said its fourth-quarter NIM fell 9 basis points from the prior quarter and plunged 75 basis points from a year earlier to 2.82%.
Valley Chairman and CEO Ira Robbins said on the company’s earnings call that “it’s areally challenging” time. But, with rates poised to decline, “we do anticipate significant margin expansion as we get back to an appropriate environment.”
Last Wednesday, Fed policymakers left their benchmark rate untouched — as they have since last summer — after boosting it at the fastest pace in 40 years between March 2022 and July 2023, to a range of 5.25% and 5.5%. The Fed forced rates higher to curb inflation that soared above 9% in 2022 and reached the highest level of this century. The Fed proved largely successful: The inflation rate fell to 3.4% at the end of last year.
Still, inflation continues to hover well above the Fed’s preferred 2% rate. What’s more, the strength of the job market and continued economic growth could reignite robust consumer spending and price spikes, Fed Chair Jerome Powell cautioned at a news conference.
“We’ve made a lot of progress on inflation,” he said. “We just want to make sure that we do get the job done in a sustainable way.”
Ahead of the Fed meeting last week, futures markets showed a 50% chance of a March rate cut. That is when the Fed meets next. Powell did not rule it out, but said: “I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting” to announce a rate reduction.
Then, on Friday of last week, the Labor Department affirmed that the employment picture continues to brighten, following robust gains over the course of 2023. It said employers added 353,000 jobs in January, the biggest gain in a year. Additionally, December’s gain was revised up to 333,000 from a prior reading of 216,000. The unemployment rate in January held steady at 3.7%, close to a four-decade low.
The economy advanced at a 3.3% annual rate in the fourth quarter, following growth in the third quarter of 4.9%, according to federal data. The January job gains keep the economy on a solid growth path, economists said.
“The January jobs report was impressively strong” and likely pushes until at least May the first Fed rate cut, said Carl Riccadonna, BNP Paribas’ chief U.S. economist.
In an interview aired Sunday night on CBS’ “60 Minutes,” Powell reiterated his press conference comments and cautioned that a March rate cut is not likely, though three reductions were still on the table for 2024.
Continued bullish employment data, and any reversal in the inflation trajectory, could further delay rate reductions. That could continue to pressure regional and community banks’ deposit expenses and, following hits to profitability in the second half of 2023, extend the bruising further into this year, analysts said.
Cooled inflation “could mean that U.S. policymakers manage to land the economy without too much turbulence — but we’re miles away from knowing that for sure,” said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown. “For now, it seems likely the economy has a touch too much wind in its sails for the Federal Reserve to change course.”
That leaves banks in wait-and-see mode.
First Foundation in Dallas, which has facedrecent investor criticism about its early handling of the rising rate environment, is a case in point. It cut 15% of its staff in 2023 to offset the strain of stubbornly high rates. The $13.3 billion-asset bank’s margin pain endured through the fourth quarter.
Its NIM shriveled to 1.36% from 1.66% the prior quarter and 2.45% a year earlier.
For First Foundation, “there’s probably, I would say, upward towards $3 billion of liabilities that would reprice immediately if the Fed were to cut rates, which would be a substantial savings and, frankly, ignite earnings back to where they once were,” President and CEO Scott Kavanaugh said on the bank’s earnings call.
While the bank expects improvement this year should the Fed’s target rate hold steady, Kavanaugh added, “obviously, it won’t be at the same pace as if the Fed were to start cutting.”
Even if the Fed does lower rates multiple times this year, as many banks anticipate, NIM expansion is likely to prove a long, gradual process.
Sandy Spring Bancorp Chairman and CEO Daniel Schrider said during the company’s earnings call that he anticipates three rate cuts in the second half of this year and more in 2025. Should those expectations prove correct, he said the bank’s margin could recover to 2022 levels late in 2025.
The $14 billion-asset bank in Olney, Maryland, said its NIM of 2.45% for the fourth quarter compared to 2.55% for the previous quarter and 3.26% for the final quarter of 2022.
Should the Fed push rates lower, “we expect the margin to bottom out in the first quarter” and “then to rebound in the second quarter and throughout the remainder of the year, by 7 to 10 basis points per quarter. We would also expect the Fed to continue rate cuts throughout 2025, which would allow the margin to move above 3% during the second half of next year.”
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Truist is selling Sterling Capital Management, which had $76 billion of assets under management at the end of December. The buyer, Guardian Capital Group, said that Sterling Capital will operate as a standalone entity and continue to be led by its current management team.
Scott McIntyre/Bloomberg
Truist Financial intends to sell an asset-management subsidiary, marking the latest step in the superregional bank’s effort to realign and simplify its operations.
Charlotte, North Carolina-based Truist confirmed Friday that it has reached an agreement to sell Sterling Capital Management to Guardian Capital Group in Toronto for $70 million, plus future payout incentives.
Sterling Capital, which had $76 billion of assets under management at the end of December, will operate as a standalone entity and continue to be led by its current management team, Guardian said in a press release. The deal is expected to close in the second quarter.
“This path forward is a win-win-win for Sterling Capital, Guardian, and Truist,” Sterling Capital CEO Scott Haenni said in the release.
“It allows Sterling Capital to grow as an independently-managed investment management firm poised for continued long-term growth under Guardian’s strategic oversight,” Haenni said. He added that Sterling Capital will “partner with Truist on shared relationships and opportunities.”
In response to a request for comment about the sale of Sterling Capital, which Truist inherited from predecessor BB&T Corp., a Truist spokesperson said in an email Friday that the company “regularly assesses opportunities … and makes adjustments to [its] business in order to invest in areas of growth.”
Sterling Capital was founded in 1970 as Nisbet and renamed Sterling Capital Management in 2001, according to its website. BB&T, which merged with SunTrust Banks in 2019 to form Truist, acquired a majority equity ownership stake in 2005, the website said.
Questions still linger about if and when the $540 billion-asset Truist will sell all or part of its 80% stake in Truist Insurance Holdings.
On Thursday, the industry publication Insurance Insider reported that Truist was nearing a deal to sell the unit to Stone Point Capital, a private equity firm in Greenwich, Connecticut, and Clayton Dubilier & Rice, a private investment firm in New York City.
A Truist spokesperson declined Friday to comment on the report that the company is nearing the sale of its insurance brokerage unit.
One analyst noted Friday that the sale of Sterling Capital is much smaller than a potential sale of Truist Insurance Holdings.
“Today’s transaction seems a bit like a sideshow in comparison to that transaction, which could reportedly be valued around $15 billion,” Scott Siefers, an analyst at Piper Sandler, wrote in a research note.
Truist executives have said several times that the company’s 80% stake in Truist Insurance Holdings offers flexibility to generate more capital.
During the company’s fourth-quarter earnings call last month, CEO Bill Rogers said: “We’ve said clearly that we’re always evaluating alternatives, and we’re going to do the best thing for the insurance business and the best thing for Truist going forward.
“As it relates to any specific timing … I don’t think I should really comment,” he added.
Executives at Cullen/Frost Bankers, Bank OZK and BankUnited have all made favorable comments recently about credit quality in their banks’ commercial real estate portfolios.
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As investors fret about how a downturn in commercial real estate could hurt the U.S. banking sector, several small and midsize lenders with substantial exposure to CRE say not to worry.
Banks whose commercial real estate portfolios have come under the microscope include Cullen/Frost Bankers in San Antonio, Florida-based BankUnited, Bank OZK in Arkansas, Seattle-based WaFd Inc. and Brookline Bancorp in Boston.
At all five of those banks, which range in size from roughly $10 billion-$50 billion of assets, executives sought during recent earnings calls to reassure analysts about their commercial real estate books, even as high interest rates and remote work stamp the sector with question marks.
The executives’ efforts were generally successful. The share prices of all five banks have risen over the last five trading days — though some increased only slightly.
The largest of the bunch, the $49 billion-asset Cullen/Frost, reported a rise in charge-offs during the fourth quarter. But CEO Phil Green said Thursday that commercial real estate loans, which make up 36% of the bank’s $18.8 billion book, weren’t the source.
“We saw an increase in problem loans this quarter,” he said during the company’s earnings call, “but it really wasn’t from commercial real estate at all.”
Nearly half of the Texas bank’s CRE transactions are classified as investor real estate — a category that includes office, multifamily and industrial properties — while the rest are mostly owner-operated properties. The biggest exposure risk on paper relates to multifamily construction, rather than office properties, which have been a sore spot for the industry, Green said in an interview.
He said that Cullen/Frost, the holding company for Frost Bank, actually had three paydowns of office properties that totaled $95 million.
During the fourth quarter at Cullen/Frost, credit quality remained above historical levels, but charge-offs still rose year over year to $11 million from $3.8 million. Green said he expects further normalization in 2024.
Cullen/Frost is hitching its wagon to the relationships it has built with borrowers, as well as the underwriting decisions it has made, Green said in the interview, which occurred after the company’s fourth-quarter earnings call.
“The reason I don’t worry about that is because of the types of properties, the locations, the quality of the projects and, most importantly, the quality of the relationships that we have,” Green said.
“It’s not something I’m really worried about. The reason is not because of anything we’re doing now. You can’t do very much now. It’s about what you’ve done over the last few years as you develop your portfolio.”
Analysts at Wedbush Securities, which have a neutral rating on Cullen/Frost’s stock, wrote in a research note that positive signs for the company include an elevated level of loan loss reserves. While Cullen/Frost’s stock price fell by 1.8% on Friday, it was still up by 0.4% for the week.
At Miami Lakes, Florida-based BankUnited, Chairman and CEO Rajinder Singh said Friday that the level of nonperforming loans, including CRE loans, is so low “it will be harder to drive them down further.”
Fourth-quarter net charge-offs were just 0.09% of average loans, which beat analysts’ expectations.
Some credit normalization appears headed BankUnited’s way, but the trend will start off a very low base. While criticized commercial loans rose by 15% quarter over quarter to $1.14 billion, nonperforming loans declined by $10 million during the three months ending Dec. 31, finishing last year at 0.52% of total loans.
“Overall on credit,” Singh said during the company’s quarterly earnings call, “I’m sleeping very well at night.”
BankUnited’s office building loans are anchored in growing South Florida markets, as well as in Manhattan. In its Manhattan portfolio, the $35.8 billion-asset company is reporting a 96% occupancy rate. “We don’t see much in the way of loss content,” Chief Operating Officer Tom Cornish said on the conference call.
Shares in BankUnited fell by 0.6% on Friday, but were up 0.5% for the week.
Similar to Bank United, the $11.4 billion-asset Brookline Bancorp reported linked-quarter declines in both total and CRE nonperforming loans. The latter category ended 2023 at $19.6 million, down 7% from Sept. 30. Net charge-offs of $7.1 million amounted to an annualized 0.30% of total loans, down from 0.47% on September 30.
Laurie Havener Hunsicker, an analyst who covers Brookline for Seaport Research Partners, raised her price target for the company’s shares by $2 to $14, largely on the strength of its credit quality performance.
“Credit costs continue to normalize, but have been better than our expectations,” Hunsicker wrote Friday in a research note.
Shares in Brookline, which reported its quarterly earnings on Wednesday, were up 5.5% this week.
At Bank OZK in Little Rock, Arkansas, nonperforming loans totaled $61 million, or 0.23% of total non-purchased loans on Dec. 31. Bank OZK’s national CRE lending unit reported full-year net charge-offs of $5 million, amounting to three basis points of its $16.9 billion portfolio.
Credit quality at the $34.2 billion-asset bank is “relatively benign and limited to a handful of transactions,” Chairman and CEO George Gleason said during a Jan. 19 earnings call.
Shares in Bank OZK are up 6.4% since it released its earnings report last week.
At the $22.6 billion-asset WaFd Inc., holding company for Washington Federal Bank, the ratio of nonperforming loans to total loans was 0.26% for the fourth quarter. Shares in WaFd are up by about 1.5% since it released its quarterly earnings report on Jan. 16.
At the time, CEO Brent Beardall sounded optimistic about prospects for continued strong credit performance in 2024. He cited a recent decline in long-term interest rates, which should make it easier for commercial real estate borrowers to make their payments.
“Much has been speculated about the potential downturn of the commercial real estate market, and we don’t know with certainty how or if that will occur, yet we do know that this decline in long-term rates narrows the refinance gap for borrowers and thus lowers credit risk for banks,” Beardall said in a press release earlier this month.
Executives at First Citizens BancShares pointed Friday to several positives following its March 2023 acquisition of the failed Silicon Valley Bank. At the same time, they warned of “headwinds” that could impact growth in that business segment, which serves startups and technology companies.
Bloomberg
Ten months after acquiring a significant portion of Silicon Valley Bank, First Citizens BancShares says it continues to retain and win back some of the failed bank’s former customers and also stabilize its deposit base, whose remarkably swift erosion last spring led to SVB’s collapse.
On Friday, executives at First Citizens — which doubled in size after the acquisition — ticked off several positives. For starters, the integration work should be finished this year, including a systems conversion of the acquired segment’s private bank that’s set to take place in the first quarter.
In addition, the loan pipeline for Silicon Valley Bank’s global fund banking unit, which serves private equity and venture capital funds, grew by about 40% during the fourth quarter, a result of attracting new and retaining existing customers, executives said. The SVB unit’s deposit base has been largely stable since April, it added 60-plus primary operating business clients between April and November, and deposits should see “modest growth” going forward, executives noted.
But there are still “headwinds” within the innovation economy that may prove to be challenging for the Silicon Valley Bank segment, they told analysts during First Citizens’ fourth-quarter earnings call.
Despite the “strong pipeline” in global fund banking, growth will continue to be “pressured” due to the ongoing slowdown in private equity and venture capital, Chief Financial Officer Craig Nix said. The company also expects “a modest decline” in technology and health care banking stemming from a reduction in venture capital fundraising and line draws as well as increased loan payoffs, he said.
While First Citizens is “very encouraged” about the coming year, there are challenges, acknowledged Marc Cadieux, president of Silicon Valley Bank’s commercial banking business.
“The innovation economy continues to go through … its own downturn,” Cadieux said on the call. We expect that’s going to continue in 2024. So our intention is to keep doing what we were doing in 2023 and hoping that 2025 and ahead [are] better.”
First Citizens, which now has $213.8 billion of assets, acquired substantially all Silicon Valley Bank’s loans and certain other assets from the Federal Deposit Insurance Corp., which acted as a receiver for Silicon Valley Bridge Bank. First Citizens decided last year to keep the Silicon Valley Bank name and brand, operating it as a division of the larger company.
In September, First Citizens launched a nationwide advertising campaign, calling it “Yes, SVB,” to raise awareness of Silicon Valley Bank’s presence and show that it is “open for business.”
The company reported fourth-quarter net income of $514 million, which was double its pre-merger total of a year earlier but fell 32% from the third quarter. Earnings per share of $34.33 fell short of the average estimate of $48.60 from analysts surveyed by FactSet Research Systems.
There were several notable items in the quarter, including $116 million of acquisition-related charges as well as a Federal Deposit Insurance Corp. special assessment of $64 million.
Noninterest expenses totaled nearly $1.5 billion, compared to $1.4 billion for the third quarter. Net charge-offs were $177 million, representing 0.53% of average loans, the same as the third quarter.
Net charge-offs are expected to be “elevated” this year in the innovation, general office and equipment finance portfolios, the company said.
The company has “taken proactive steps to help limit losses,” Nix said on the call.
First Citizens confirmed Friday that it plans to buy back shares in the second half of this year, pending regulatory approval. The company halted repurchases last year.
The Biden administration’s announcement Friday that it’s pausing liquefied natural gas export approvals sparked political backlash, drew cheers from climate activists and stoked uncertainty in energy markets, but is unlikely to see the U.S. give up its title as the world’s top LNG exporter.
The U.S. will delay its decisions on new LNG exports to non-free trade agreement countries, allowing time for the Energy Department to update the underlying analyses for LNG export authorizations, the White House said.
Those analyses are roughly five years old and “no longer adequately account for considerations” such as potential cost increases for American consumers and manufacturers or the “latest assessment of the impact of greenhouse gas emissions,” it said.
The Biden administration likely “realizes the role of LNG in foreign policy, but at the same time it needs to show the Democrat base that it is doing something for climate change,” said Anas Alhajji, an independent energy expert and managing partner at Energy Outlook Advisors, pointing out that the announcement comes during a presidential election year.
“Delaying one project or stopping it may not be a big deal, but it is a problem if it becomes a trend,” he said in emailed commentary.
Environmental groups, which have pushed for action, cheered the decision.
The 12 impacted projects in the U.S. “would spew out as much climate-warming pollution as 223 coal plants per year, and they present explosion risks to the communities where they’re located and emit other health-harming chemicals,” the Sierra Club, an environmental group, said in a statement welcoming the decision.
Top exporter
The announcement is particularly important for a nation that became the world’s biggest LNG exporter in the span of less than a decade.
The U.S. became the world’s largest LNG exporter during the first half of 2022 on the back of increases in LNG export capacity, international natural gas and LNG prices, and global demand, particularly in Europe, according to the Energy Information Administration.
The country’s exports of LNG climbed to a fresh record in November 2023, with the EIA reporting domestic exports of 386.2 billion cubic feet, up from 384.4 bcf a month earlier. Exports in December 2016 were at just 41.8 bcf.
U.S. LNG exports soared after 2016.
EIA
With 90% of U.S. LNG going to non-free trade agreement destinations, withholding licensing effectively “halts project development,” John Miller, managing director, ESG and sustainability policy at TD Cowen wrote in a Friday note.
Equities
LNG equities with operating facilities likely won’t benefit from the administration’s announcement, at least not immediately, until the impacts of this pause in export approvals to non-FTA countries becomes more clear, Jason Gabelman, director, sustainability & energy transition at TD Cowen said.
U.S. companies with government approvals that have not been sanctioned, “could have a higher probability of moving forward this year, albeit modestly” as offtakers may be hesitant to sign up to new U.S. projects with LNG development getting “politicized,” he said. Among those, he pointed out approvals for proposed liquefaction units at NextDecade Corp.’s NEXT, +2.30%
Rio Grande LNG export facility project in Brownsville, Texas.
At the same time, it would not be a surprise if U.S. LNG companies pursuing growth that do not yet have non-FTA approval see downside pressure, said Gabelman.
LNG projects take around 4 years to build and any delays to project sanctions today will take “multiple years to manifest in the market,” he said.
Still, the U.S. announcement “introduces the risk of more stringent oversight that could limit new U.S. capacity” more than four years out, Gabelman said.
Companies that supply equipment to LNG liquefaction projects include Baker Hughes Co. BKR, +0.59%
and Chart Industries Inc. GTLS, -7.54%,
said Marc Bianchi, a senior energy analyst at TD Cowen.
Any slowing of approval would create “overhand on order growth,” he said.
Climate change
The White House said Friday that its decision will not impact the ability of the U.S. to continue supplying LNG to its allies in the near term but also acknowledged environmental concerns.
“I think we’ve got to be clear eyed about the challenges that we face. The climate crisis is an existential crisis, and we’ve got to be, I think, really forward leaning into making sure that we’re taking that head on,” said Ali Zaidi, the White House national climate adviser, told reporters Friday.
He added that given the number of approvals already completed, the number of projects under construction are set to double existing capacity with approvals beyond that set to double capacity yet again.
“So there’s a long runway here, and we’re taking a step back and thinking, OK, let’s take a hard look before that runway continues to build out,” he said.
Rob Thummel, senior portfolio manager at Tortoise, argued that U.S. LNG exports actually reduce global carbon emissions as natural gas typically “displaces coal to generate electricity in countries such as China and India.”
They also improve global energy security as U.S. natural gas is becoming Europe’s primary energy supplier, replacing Russia, he said.
In a statement Friday, Sen. Joe Manchin, a West Virginia Democrat and chairman of the U.S. Senate Energy and Natural Resources Committee, said that if the Biden administration has facts to prove that additional LNG export capacity would hurt Americans, it needs to make that information public. But if the pause is “another political ploy to pander to keep-it-in-the-ground climate activists,” he said he would “do everything in my power to end this pause immediately.
Manchin plans to hold a hearing on the decision in the coming weeks.
Market impact
The U.S. decision to delay new LNG export permits is unlikely to have an impact on domestic natural-gas supplies or prices, said Energy Outlook Advisors’ Alhajji.
LNG prices and the rate at which new LNG export terminals can be constructed help determine LNG export volumes, the EIA said, and higher LNG exports can result in upward pressure on U.S. natural-gas prices, while lower U.S. LNG exports can pressure prices.
On Friday, natural gas for February delivery NG00, +0.23%
NGG24, +0.26%
settled at $2.71 per million British thermal units, up 7.7% for the week.
Meanwhile, the U.S. is likely to keep its position as the world’s top LNG exporter, according to Tortoise’s Thummel.
The U.S. is the currently the largest LNG exporter at almost 12 bcf per day, with Qatar coming in second, he said.
Qatar is expanding its LNG export capacity and is expected to have the ability to export almost 20 bcf per day by 2028, he said. The EIA reported recently that Qatar has averaged 10.3 bcf per day in exports during the last 10 years.
That would mark sizable growth. But the EIA reported in November that LNG export capacity from North America is likely to more than double from around 11.4 bcf per day to 24.3 bcf per day by the end of 2027.
The EIA said North America’s LNG export capacity is likely to more than double by 2027.
EIA
Given expected growth in U.S. LNG export capacity, the U.S. is likely to “remain the largest exporter of LNG in the world” despite the U.S. announcement, said Thummel.
Huntington Bancshares is projecting that its average loans will rise by 3% to 5% over the coming year, while its deposits will increase by 2% to 4%, and its non-interest income will rise by 5% to 7%.
The Columbus, Ohio-based bank said Friday that it expects its expenses to rise by about 4.5% in 2024. CEO Steve Steinour argued that Huntington is positioned to execute on its contrarian spending plan due to economic strength in its Midwest stomping ground and its development of specialty banking verticals over the last year.
He said continued investments in high-performing markets, like North Carolina and South Carolina, and in recently launched lines of business, such as health care asset-based lending and fund finance, will lead to growth at the $189.4 billion-asset bank.
“It would appear that our outlook is more bullish than anyone else’s in terms of growth, and yet we’re highly confident that we’ll be able to deliver it,” Steinour said Friday in an interview with American Banker. “We’re coming into 2024 with momentum and excitement and an expectation of ourselves to continue to play offense, invest and build.”
Steinour said the focus is on organic growth — specifically on building in markets like the Carolinas and Texas, where the bank has had a presence, and in places where it gained footing from its 2021 acquisition of TCF Financial, like Colorado and Minnesota.
The bank’s spending hit $1.12 billion in the fourth quarter, a 4% climb sequentially, in line with its previous guidance, as it pushed geographic expansion in late 2023.
During a call with analysts on Friday, Huntington Chief Financial Officer Zach Wasserman said that the investments will have long-term benefits that outweigh what he characterized as “short-term challenges with respect to operating leverage.”
Huntington reported fourth quarter net interest income of $1.3 billion, a quarter-over-quarter decline of 4% and a year-over-year drop of 10%. Wasserman said he expects that figure to dip further in the first quarter, but then to increase sequentially throughout 2024 as loans pick up.
Huntington is not eschewing cost-cutting entirely. Some of its initiatives are meant to ratchet back expenses over the long term, Wasserman said.
The bank is increasing offshoring, offering a voluntary retirement program and consolidating branches. And it has been pulling back in some lines of business, like commercial real estate lending.
Still, Wasserman said that the long-term earnings potential of staying in a growth posture is much more advantageous than the reverse. “We were pretty purposeful about staying on a growth footing across the board,” he said.
Some peer banks, meanwhile, are cutting expenses as their deposit costs increase and their loan originations underwhelm.
Regions Financial brought down its non-interest expenses 5% in the fourth quarter, and the Birmingham, Alabama-based bank is projecting “muted loan growth.” At PNC Financial Services Group, fourth-quarter spending was down 2% amid a 43% drop in net interest income from the same period in 2022.
In 2023, Huntington pulled in $5.48 billion of net interest income. Wasserman said that if interest rates remain higher for longer and loan growth hits projections, the bank’s net interest income could rise by about 2% this year. But if rates and loan growth are tamped down, that figure could fall by 2%, he said.
While Huntington’s net interest income and fee income slowed down in the fourth quarter, Steinour said that deposit and loan stability in 2023 affirmed the bank’s efforts to deepen customer relationships.
The bank has also been bolstering its capital position ahead of the proposed Basel III endgame rules, which would require large banks to significantly increase their reserves.
For the coming year, Huntington is projecting that its average loans will rise by 3% to 5%, its deposits will increase by 2% to 4%, and its non-interest income will rise by 5% to 7%, primarily from fees associated with the bank’s growing capital markets and wealth management businesses.
The bank’s stock price rose by 3.9% on Friday to $12.72.
In its fourth quarter, Texas Capital’s strategy hit a roadblock, as investment banking and trading income and mortgage loans sank. However, the company is still aiming high for its 2025 goals.
Adobe Stock
Texas Capital Bancshares is braced for “inconsistent” revenues in the near term as its mortgage finance business takes a hit, but annual results from 2023 show the bank’s progress as it executes a massive, four-year strategic overhaul.
The Dallas-based bank had a rougher-than-expected end to last year, in part driven by a $751 million quarterly drop in mortgage finance loans. The sputtering in the business was tied to “predictable seasonality,” as fourth quarters are often weaker for home-buying, but the bottom isn’t in sight. Texas Capital expects next quarter to be “amongst the toughest the industry has seen in the last 15 years,” said CFO Matt Scurlock on the company’s fourth-quarter earnings call Thursday.
Net interest income at the bank fell nearly $18 million in the quarter to $214.7 million, which Jefferies analysts wrote “disappointed slightly,” and Scurlock attributed almost entirely to the mortgage finance slump, which has impacted rates across the country. However, CEO Rob Holmes said despite the blip, the bank’s mortgage strategy is aligned with long-term goals of deepening relationships with target clients.
“The firm has been and remains committed to banking the mortgage finance industry as it weathers what is the most challenging operating environment in the last 15 years,” Holmes said on the bank’s earnings call. “Over the previous 18 to 24 months, we have refocused client selection and improved the service model as we look not to expand market share, but to instead deepen relationships to improve relevance with the right clients.”
Cross-selling is working, he said: of clients that started with just a warehouse line of credit Holmes said that all of them now have some treasury relationship with the bank, and nearly half have an account open with a broker-dealer at the bank. The company’s stock rose 2.43%, to $63.12 per share, on Thursday.
Texas Capital wasn’t able to make up the revenue lost in its mortgage business either, with a fourth quarter of flat commercial loans, stagnant or lower fee income and a fall in investment banking and trading income.
Holmes launched a massive transformation of Texas Capital when he took the helm in 2021, coming off a three-decade career at JPMorgan Chase. The $28.4 billion-asset bank’s metamorphosis included recalibrating its target commercial client base, launching an investment bank, adding wealth management and treasury products, and investing in infrastructure and front-end staffing.
As part of the master blueprint, Holmes set ambitious goals with a 2025 deadline, including a return on assets of greater than 1.1% and return on tangible common equity of over 12.5%, which a post-earnings note from Jefferies analysts said, “will require dramatic improvement in the next year,” since the bank saw those metrics at .47% and 4.4%, respectively, in the fourth quarter.
Still, Holmes said the bank has the products, tech and talent in place to meet its objectives. While there’s fine-tuning to do, Holmes said now that the more-dramatic parts of Texas Capital’s evolution are done, it’s basically a “brand new bank.”
“It’s 100% execution now, that’s what’s so exciting about where we are in the transformation,” Holmes said. “The risk of the build is done. We have a core competency now of taking efficiencies and improving client journeys. We have data-as-a-service. We feel really good about the tech platform and the run-the-bank versus change-the-bank composition of the spend.”
Some of the pieces of the strategy, though in their early stages, are beginning to prove longer-term value. Texas Capital’s investment banking and trading business, which was nearly non-existent before 18 months ago, increased annual income by 146%, to $86.2 million, even though quarterly income fell more than 60%.
The bank deemed its investment bank an “area of focus,” along with assets under management, treasury product fees and wealth management and trust fees, which altogether grew 64% from the previous year. In 2023, investment banking and trading generated 8% of the bank’s total revenue, and the goal is to have the unit bring in 10% of total revenue in 2025.
“When we launched the strategy, we acknowledged that results generated by the newly formed investment bank would not be linear, and that it would take several years to mature the business with a solid base of consistent and repeatable revenues,” Holmes said. “Despite broad-based early success, we expect revenue trends to be inconsistent in the near-term – the same as all firms – as we work to translate early momentum into a sustainable contributor to future earnings.”
In 2024, Bank of New York Mellon is forecasting a year-over-year decline in net interest revenue of approximately 10%, but it expects to hold the line on expenses and to benefit from higher fee revenue.
Angus Mordant/Bloomberg
Bank of New York Mellon is managing expectations about its financial performance in 2024, while simultaneously assuring investors that its profitability will improve significantly over the next three to five years, as President and CEO Robin Vince continues to reshape the company.
During BNY Mellon’s earnings call on Friday, company executives and analysts moved beyond the fourth-quarter results to focus on the company’s outlook for 2024 and beyond. Vince, who became CEO in August 2022, said that last year the firm “laid a foundation for a multi-year transformation.”
“Though we are still at the beginning of our transformation journey, our ability this past year, not just to deliver on our commitments but to exceed them, gives us confidence that we can affect meaningful change and consistently improve our financial performance over time,” Vince said.
In 2024, BNY Mellon expects its earnings to be affected by both positive and negative factors. On the bullish side, the company anticipates that its fee revenue will rise, though it did not specify by how much.
The firm is also projecting that expenses, excluding notable items, will be roughly flat from 2023. Expense management has been an emphasis during Vince’s 17-month tenure as CEO. A year ago, BNY Mellon rolled out an expense reduction plan called “Project Catalyst.”
Holding the line on expenses continues to be important in 2024. Amid anticipation that the company’s deposit margins will compress and that there will be modest run-off in its deposit volumes, BNY Mellon is forecasting a year-over-year decline in net interest revenue of approximately 10%.
BNY Mellon executives hope that investors will look not only at 2024, but will look ahead to the next several years. On Friday, they laid out a series of financial targets for the medium term, which they defined as the next three to five years.
One target is to achieve a return on tangible common equity of at least 23%. That performance metric landed between 20.2% and 22.6% during the first three quarters of last year before falling to 5.6% in the fourth quarter.
“In publishing our medium-term financial targets, together with our most important strategic priorities and the actions that will help us achieve them,” Chief Financial Officer Dermot McDonogh told analysts, “we are providing transparency to allow you all to track our progress. And we are confident that we will deliver.”
One way that BNY Mellon hopes to improve its financial performance over the medium term is by harnessing artificial intelligence. Last year, the bank set up an AI Hub, where engineers are working to build out capabilities.
“We actually have a piece of software today that is creating predictions for clients in our treasuries business,” Vince said on Friday. “That was a very early AI implementation that we made, and it’s actually a piece of software that we currently earn some revenue on.”
Vince also spoke about ways that AI can be used to make BNY Mellon’s operations more efficient.
“In one particular case, it’s helping our research team get a march on the day,” he said. “So rather than getting up at four in the morning to write research, they get up at six in the morning to write research. Because the AI has given them a rough draft to start with and served up a bunch of data for them.”
Shares in BNY Mellon closed up 4% on Friday at $54.85.
Jane Fraser has spent the past three years laying out a vision for a simplified Citigroup and beginning a series of changes meant to improve the company’s profitability and returns.
Now, for investors, 2024 is “show me” time.
On Friday, Fraser — who became CEO of the $2.4 trillion-asset company in March 2021 — reiterated her assurances that Citi is shedding its old skin and nearing a complete transformation. The company, whose operations have been far-flung for years, is engaged in a massive, multiyear restructuring that involves selling or winding down lagging businesses and eliminating 20,000 jobs, or about 10% of its total workforce, by the end of 2026.
Speaking to analysts during Citi’s fourth-quarter results call, Fraser said 2024 will be “a turning point” because the company “will be able to completely focus on the performance” of its five core businesses — markets, business banking, wealth management, U.S. personal banking, as well as treasury, trade and securities services — and its ongoing risk management improvements.
“We know that 2024 is critical as we prepare to enter the next phase of our journey, and we are completely focused on delivering our medium-term target and our transformation,” Fraser said on the call.
“I recognize the importance of this year, and I am highly confident that we will see the benefits of the actions we’ve taken through the momentum of our businesses,” she said.
But myriad challenges remain, especially the steep job cuts at hand and the delicate balance of reducing expenses while growing revenue, said analyst Stephen Biggar of Argus Research.
“Look, this is a company now that is really ripping the Band-Aid off, so to speak,” Biggar said in an interview. “A 10% head-count reduction is not the norm, [nor is] the sale of this many businesses … and they’re calling for rising revenues, which is a challenge when you’re reducing head count.”
He agreed with Fraser’s view that 2024 must be the turning point. If she enters her fourth year at the helm without tangible improvements, “then I would say something’s going haywire,” he said.
“I hope we don’t come to 2025, and she says that that’s the transformative year,” he added.
The company, whose profitability has long lagged its big-bank peers, is trying to rebuild itself after years of underperformance.
Citi executives said that revenue for full-year 2024 will rise about 4%, excluding certain divestitures, while expenses should decline between 0.9% to 1.5%, excluding divestitures and also special assessment fees charged by the Federal Depository Insurance Corp.
It also is aiming for an efficiency ratio of less than 60%, a common equity tier 1 capital ratio of 11.5% to 12%, and a return on tangible common equity ratio of 11% to 12%.
There’s a long way to go on some of those metrics. Full-year 2023 ROTCE was 4.9%.
Citi’s fourth-quarter call had been highly anticipated for several months as analysts and industry observers sought to glean more information about the company’s current organizational overhaul, which was announced in September. The overhaul is designed to strip out several layers of management, as well as affiliated support teams, to create a leaner, flatter company.
Friday’s call marked the first time that Citi has put a solid number on its head-count reduction plans. During the first quarter of this year, it is planning to chop out about 5,000 roles, which will result in $1 billion of run-rate savings, executives announced. That decision comes on top of roughly 7,000 jobs that were axed in the fourth quarter and 6,000 during the first nine months of the year.
For all of 2024, Citi expects to spend between $700 million and $1 billion on severance and other costs related to the reorganization, it said. Last year, it spent $600 million between January and September on severance-related costs and a combined $900 million on severance and restructuring in the fourth quarter, the latter of which contributed to Citi’s fourth-quarter net loss.
For the quarter, Citi reported a net loss of $1.8 billion and blamed it on four items: restructuring charges; an FDIC assessment of $1.7 billion; a reserve build of $1.3 billion related to businesses in Russia and Argentina; and $880 million tied to the devaluation of the Argentine currency.
While end-of-period loans were up 5%, end-of-period deposits were down 4%.
“2023 was a foundational year, in which we made substantial progress simplifying Citi and executing the strategy” that was presented at an investor day in 2022, Fraser said on the call.
Still, “the fourth quarter was clearly very disappointing,” she said.
So far, Citi has exited nine of the 14 international consumer franchises that it is selling or winding down, Fraser said. It has also wound down about 70% of retail loans and deposits in Russia, Korea and China, is pursuing the sale of its Poland business and is making progress on a plan to pursue an initial public offering for its consumer franchise in Mexico, known as Banamex, she said.
In the past month, it has exited “marginal businesses” such as its muni business and distressed debt trading “to focus on our core strength and allocate our capital with rigor,” Fraser said.
Biggar, who has covered Citi for two decades, said the faster it can rein in its operations, the better and more consistent its earnings would become.
“It’s getting it all right,” he said. “All these things individually in a vacuum sound great, but you have to continue to execute.”
In a research report before Citi’s results were announced, analysts at Piper Sandler said Citi stock has become this year’s “must own.” And while the analysts are “cheering” for Fraser and Chief Financial Officer Mark Mason, “the reality to us is that this turnaround will take a long time to effect,” they said.
Investors’ post-call enthusiasm for Citi was tempered. The stock ended the day up less than 1%.
