Regional bank stocks are breaking out, and they may be able to continue to climb even if second quarter earnings results are modest. The SPDR S & P Regional Bank ETF (KRE) has risen for six straight trading sessions and on Monday closed at its highest level since December. The regional bank ETF’s 12.5% rally in July has coincided with declining bond yields and increased confidence among traders that the Federal Reserve will start cutting interest rates in September. KRE 1Y mountain This regional bank ETF is at its highest level since December. Of course, any rate cuts later this year won’t be reflected in second-quarter results, nor will the lower bond yields that followed last week’s surprisingly cool inflation report. But markets are forward looking, and investors could draw inspiration from the fact that bank stocks outperformed after rates peaked in 1995, the last time the Fed pulled off a “soft landing” in the economy. “Banks stocks rose 54% in 1995 (+34% S & P) on the back of a Fed pause following 250bp in rate hikes,” Bank of America analyst Ebrahim Poonawala said in a July 11 note. “While we recognize that no two periods are the same, the combination of discounted valuations and investor comfort around EPS outlooks coming out of 2Q24 prints could set the stage for a sustained bounce into U.S. elections,” he added. Regional banks have struggled during the post-pandemic rate-hiking cycle, as the rapid rise in rates hurt their core business of borrowing short-term in the form of deposits, which have risen in cost, while making long-term loans. Commercial real estate is also a weak spot for smaller banks compared to their more diversified, larger peers. The group still trades below historical valuations more than a year after the failure of Silicon Valley Bank, according Bank of America said. However, rate cuts should help ease the concerns that have weighed on the sector. “Banks hurt by higher funding costs, and/or perceived commercial real estate (CRE) risks should react positively, We highlight Buy-rated Western Alliance -WAL, Neutral-rated New York Community -NYCB as two banks that could particularly benefit from lower rates,” Poonawala said. At the individual stock level, discussions about loan loss reserves and net interest income could be key for the regional banks, Goldman analyst Ryan Nash said in a July 1 note. “We could be at the peak for reserves (we conservatively model a 2bp increase) and any additions to [loan loss reserve] ratios are likely driven by shrinking balances. We expect the focus to be on 2H [net interest income] guides which should be decent given tailwinds from fixed rate asset re-pricing, some pick-up in loan growth and decelerating increases in deposit costs,” Nash said. Notable regional bank earnings reports this week include Citizens Financial Group on Wednesday, M & T Bank on Thursday and Fifth Third Bancorp on Friday. — CNBC’s Michael Bloom contributed reporting.
Of about 4,000 U.S. banks analyzed by the Klaros Group, 282 banks face stress from commercial real estate exposure and higher interest rates. The majority of those banks are categorized as small banks with less than $10 billion in assets. “Most of these banks aren’t insolvent or even close to insolvent. They’re just stressed,” Brian Graham, Klaros co-founder and partner at Klaros. “That means there’ll be fewer bank failures. But it doesn’t mean that communities and customers don’t get hurt.”
A New York Community Bank stands in Brooklyn, New York City, on Feb. 8, 2024.
Spencer Platt | Getty Images
New York Community Bank on Wednesday posted a quarterly loss of $335 million on a rising tide of soured commercial loans and higher expenses, but the lender’s stock surged on its new performance targets.
The first-quarter loss, equal to 45 cents per share, compared to net income of $2.0 billion, or $2.87 per share a year earlier. When adjusted for charges included merger-related items, the loss was $182 million, or 25 cents per share, deeper than the 15 cents per share loss estimate from LSEG.
“Since taking on the CEO role, my focus has been on transforming New York Community Bank into a high-performing, well-diversified regional bank,” CEO Joseph Otting said in the release. “While this year will be a transitional year for the company, we have a clear path to profitability over the following two years.”
The bank will have higher profitability and capital levels by the end of 2026, Otting said. That includes a return on average earning assets of 1% and a targeted common equity tier 1 capital level of 11% to 12%.
Otting took over at the beleaguered regional bank at the start of April after an investor group led by former Treasury Secretary Steven Mnuchin injected more than $1 billion into the lender.
Shares of the bank jumped 15% in premarket trading.
This story is developing. Please check back for updates.
Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., February 7, 2024.
Brendan Mcdermid | Reuters
The benefits of scale will never be more obvious than when banks begin reporting quarterly results on Friday.
Ever since the chaos of last year’s regional banking crisis that consumed three institutions, larger banks have mostly fared better than smaller ones. That trend is set to continue, especially as expectations for the magnitude of Federal Reserve interest rates cuts have fallen sharply since the start of the year.
The evolving picture on interest rates — dubbed “higher for longer” as expectations for rate cuts this year shift from six reductions to perhaps three – will boost revenue for big banks while squeezing many smaller ones, adding to concerns for the group, according to analysts and investors.
JPMorgan Chase, the nation’s largest lender, kicks off earnings for the industry on Friday, followed by Bank of America and Goldman Sachs next week. On Monday, M&T Bank posts results, one of the first regional lenders to report this period.
The focus for all of them will be how the shifting view on interest rates will impact funding costs and holdings of commercial real estate loans.
“There’s a handful of banks that have done a very good job managing the rate cycle, and there’s been a lot of banks that have mismanaged it,” said Christopher McGratty, head of U.S. bank research at KBW.
Take, for instance, Valley Bank, a regional lender based in Wayne, New Jersey. Guidance the bank gave in January included expectations for seven rate cuts this year, which would’ve allowed it to pay lower rates to depositors.
Instead, the bank might be forced to slash its outlook for net interest income as cuts don’t materialize, according to Morgan Stanley analyst Manan Gosalia, who has the equivalent of a sell rating on the firm.
Net interest income is the money generated by a bank’s loans and securities, minus what it pays for deposits.
Smaller banks have been forced to pay up for deposits more so than larger ones, which are perceived to be safer, in the aftermath of the Silicon Valley Bank failure last year. Rate cuts would’ve provided some relief for smaller banks, while also helping commercial real estate borrowers and their lenders.
Valley Bank faces “more deposit pricing pressure than peers if rates stay higher for longer” and has more commercial real estate exposure than other regionals, Gosalia said in an April 4 note.
Meanwhile, for large banks like JPMorgan, higher rates generally mean they can exploit their funding advantages for longer. They enjoy the benefits of reaping higher interest for things like credit card loans and investments made during a time of elevated rates, while generally paying low rates for deposits.
JPMorgan could raise its 2024 guidance for net interest income by an estimated $2 billion to $3 billion, to $93 billion, according to UBS analyst Erika Najarian.
Large U.S. banks also tend to have more diverse revenue streams than smaller ones from areas like wealth management and investment banking. Both should provide boosts to first-quarter results, thanks to buoyant markets and a rebound in Wall Street activity.
Furthermore, big banks tend to have much lower exposure to commercial real estate compared with smaller players, and have generally higher levels of provisions for loan losses, thanks to tougher regulations on the group.
That difference could prove critical this earnings season.
Concerns over commercial real estate, especially office buildings and multifamily dwellings, have dogged smaller banks since New York Community Bank stunned investors in January with its disclosures of drastically larger loan provisions and broader operational challenges. The bank needed a $1 billion-plus lifeline last month to help steady the firm.
NYCB will likely have to cut its net interest income guidance because of shrinking deposits and margins, according to JPMorgan analyst Steven Alexopoulos.
There is a record $929 billion in commercial real estate loans coming due this year, and roughly one-third of the loans are for more money than the underlying property values, according to advisory firm Newmark.
“I don’t think we’re out of the woods in terms of commercial real estate rearing its ugly head for bank earnings, especially if rates stay higher for longer,” said Matt Stucky, chief portfolio manager for equities at Northwestern Mutual.
“If there’s even a whiff of problems around the credit experience with your commercial lending operation, as was the case with NYCB, you’ve seen how quickly that can get away from you,” he said.
A New York Community Bank stands in Brooklyn on February 08, 2024 in New York City.
Spencer Platt | Getty Images
New York Community Bank, the regional lender that needed a $1 billion-plus lifeline last month, is offering the country’s highest interest rate for a savings account.
NYCB raised the annual percentage yield offered via its online arm, My Banking Direct, to 5.55%, higher than any other bank’s widely available account, according to Ken Tumin, an analyst who tracks rates for his website DepositAccounts.
The standout rate could be a sign that NYCB is facing funding pressure, Tumin said.
“It looks like they’re trying really hard to attract deposits,” Tumin said. “My Banking Direct has been around for a long time, more than 10 years, so them having an aggressive rate could be a sign of neediness” for funding.
NYCB’s woes began in January, when it said it was preparing for far greater losses on commercial real estate loans than analysts had expected. That set off a downward spiral in its stock price, downgrades from rating agencies and multiple management changes. The bank announced a capital injection from investors led by former Treasury Secretary Steven Mnuchin’s Liberty Strategic Capital on March 6.
In the month before the rescue was announced, NYCB shed 7% of its deposits, falling to $77.2 billion by March 5, the bank said in a presentation.
During a conference call held after the capital raise, analysts asked how NYCB managed to retain so much of its deposits during the tumultuous period.
“We didn’t do anything crazy relative to deposit pricing,” NYCB chairman Sandro DiNello replied. “We didn’t go out and offer 6% CDs or something like that in order to make the numbers look good, if that’s what you’re concerned with.”
NYCB didn’t return a call for comment on its funding strategy.
Joseph Otting, a former comptroller of the currency, took over as the bank’s CEO on April 1, about a week before the rate increase.
Despite the turnaround plan, shares of NYCB still trade for under $4 apiece and are off more than 68% year to date.
Other banks offering rates higher than 5% right now tend to be newer or smaller players than NYCB, according to Tumin.
Among established banks, the average high-yield savings rate is about 4.4%, and several of them (including American Express, Goldman Sachs and Ally) have dropped rates in the past month, he said. The NYCB rate also tops accounts listed on NerdWallet and Bankrate.
Customer deposits at My Banking Direct are insured by the FDIC up to the standard $250,000.
Over the past two years, savings account rates have broadly been on the rise.
Since the regional banking crisis consumed Silicon Valley Bank and First Republic last year, smaller players have been forced to pay higher rates for deposits compared to giants like JPMorgan Chase in order to compete, said Matt Stucky, chief portfolio manager for equities at Northwestern Mutual.
“When a bank has to go out and advertise a much higher rate, it’s typically because they have a deposit problem,” Stucky said. “It’s not hard for customers to switch banks anymore.”
The forces that consumed three regional lenders in March 2023 have left hundreds of smaller banks wounded, as merger activity — a key potential lifeline — has slowed to a trickle.
As the memory of last year’s regional banking crisis begins to fade, it’s easy to believe the industry is in the clear. But the high interest rates that caused the collapse of Silicon Valley Bank and its peers in 2023 are still at play.
After hiking rates 11 times through July, the Federal Reserve has yet to start cutting its benchmark. As a result, hundreds of billions of dollars of unrealized losses on low-interest bonds and loans remain buried on banks’ balance sheets. That, combined with potential losses on commercial real estate, leaves swaths of the industry vulnerable.
Of about 4,000 U.S. banks analyzed by consulting firm Klaros Group, 282 institutions have both high levels of commercial real estate exposure and large unrealized losses from the rate surge — a potentially toxic combo that may force these lenders to raise fresh capital or engage in mergers.
The study, based on regulatory filings known as call reports, screened for two factors: Banks where commercial real estate loans made up over 300% of capital, and firms where unrealized losses on bonds and loans pushed capital levels below 4%.
Klaros declined to name the institutions in its analysis out of fear of inciting deposit runs.
But there’s only one company with more than $100 billion in assets found in this analysis, and, given the factors of the study, it’s not hard to determine: New York Community Bank, the real estate lender that avoided disaster earlier this month with a $1.1 billion capital injection from private equity investors led by ex-Treasury Secretary Steven Mnuchin.
Most of the banks deemed to be potentially challenged are community lenders with less than $10 billion in assets. Just 16 companies are in the next size bracket that includes regional banks — between $10 billion and $100 billion in assets — though they collectively hold more assets than the 265 community banks combined.
Behind the scenes, regulators have been prodding banks with confidential orders to improve capital levels and staffing, according to Klaros co-founder Brian Graham.
“If there were just 10 banks that were in trouble, they would have all been taken down and dealt with,” Graham said. “When you’ve got hundreds of banks facing these challenges, the regulators have to walk a bit of a tightrope.”
These banks need to either raise capital, likely from private equity sources as NYCB did, or merge with stronger banks, Graham said. That’s what PacWest resorted to last year; the California lender was acquired by a smaller rival after it lost deposits in the March tumult.
Banks can also choose to wait as bonds mature and roll off their balance sheets, but doing so means years of underearning rivals, essentially operating as “zombie banks” that don’t support economic growth in their communities, Graham said. That strategy also puts them at risk of being swamped by rising loan losses.
Federal Reserve Chair Jerome Powell acknowledged this month that commercial real estate losses are likely to capsize some small and medium-sized banks.
“This is a problem we’ll be working on for years more, I’m sure. There will be bank failures,” Powell told lawmakers. “We’re working with them … I think it’s manageable, is the word I would use.”
There are other signs of mounting stress among smaller banks. In 2023, 67 lenders had low levels of liquidity — meaning the cash or securities that can be quickly sold when needed — up from nine institutions in 2021, Fitch analysts said in a recent report. They ranged in size from $90 billion in assets to under $1 billion, according to Fitch.
And regulators have added more companies to their “Problem Bank List” of companies with the worst financial or operational ratings in the past year. There are 52 lenders with a combined $66.3 billion in assets on that list, 13 more than a year earlier, according to the Federal Deposit Insurance Corporation.
Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., February 7, 2024.
Brendan Mcdermid | Reuters
“The bad news is, the problems faced by the banking system haven’t magically gone away,” Graham said. “The good news is that, compared to other banking crises I’ve worked through, this isn’t a scenario where hundreds of banks are insolvent.”
After the implosion of SVB last March, the second-largest U.S. bank failure at the time, followed by Signature’s failure days later and that of First Republic in May, many in the industry predicted a wave of consolidation that could help banks deal with higher funding and compliance costs.
But deals have been few and far between. There were fewer than 100 bank acquisitions announced last year, according to advisory firm Mercer Capital. The total deal value of $4.6 billion was the lowest since 1990, it found.
One big hang-up: Bank executives are uncertain that their deals will pass regulatory muster. Timelines for approval have lengthened, especially for larger banks, and regulators have killed recent deals, such as the $13.4 billion acquisition of First Horizon by Toronto-Dominion Bank.
“Banks are in this pressure cooker,” said Chris Caulfield, senior partner at consulting firm West Monroe. “Regulators are playing a bigger role in what M&A can occur, but at the same time, they’re making it much harder for banks, especially smaller ones, to be able to turn a profit.”
Despite the slow environment for deals, leaders of banks all along the size spectrum recognize the need to consider mergers, according to an investment banker at a top-three global advisory firm.
Discussion levels with bank CEOs are now the highest in his 23-year career, said the banker, who requested anonymity to speak about clients.
“Everyone’s talking, and there’s acknowledgment consolidation has to happen,” said the banker. “The industry has structurally changed from a profitability standpoint, because of regulation and with deposits now being something that won’t ever cost zero again.”
Another reason to expect heightened merger activity is the age of bank leaders. A third of regional bank CEOs are older than 65, beyond the group’s average retirement age, according to 2023 data from executive search firm Spencer Stuart. That could lead to a wave of departures in coming years, the firm said.
“You’ve got a lot of folks who are tired,” said Frank Sorrentino, an investment banker at boutique advisory Stephens. “It’s been a tough industry, and there are a lot of willing sellers who want to transact, whether that’s an outright sale or a merger.”
Sorrentino was involved in the January merger between FirstSun and HomeStreet, a Seattle-based bank whose shares plunged last year after a funding squeeze. He predicts a surge in merger activity from lenders between $3 billion and $20 billion in assets as smaller firms look to scale up.
One deterrent to mergers is that bond and loan markdowns have been too deep, which would erode capital for the combined entity in a deal because losses on some portfolios have to be realized in a transaction. That has eased since late last year as bond yields dipped from 16-year highs.
That, along with recovering bank stocks, will lead to more activity this year, Sorrentino said. Other bankers said that larger deals are more likely to be announced after the U.S. presidential election, which could usher in a new set of leaders in key regulatory roles.
Easing the path for a wave of U.S. bank mergers would strengthen the system and create challengers to the megabanks, according to Mike Mayo, the veteran bank analyst and former Fed employee.
“It should be game-on for bank mergers, especially the strong buying the weak,” Mayo said. “The merger restrictions on the industry have been the equivalent of the Jamie Dimon Protection Act.”
It’s been a year this week since the collapse of Silicon Valley Bank sent shockwaves through the banking sector. While the crisis most directly affected the regionals, major U.S. financial institutions for most of 2023 also found their stocks under assault. Big banks, like Club holding Wells Fargo , were largely able to turn the corner. The question is still out on the smaller lenders. On March 10, 2023, SVB abruptly shuttered and regulators seized the firm’s deposits — marking the largest U.S. banking failure since the 2008 financial crisis. The go-to bank of tech venture capitalists went from a well-capitalized institution seeking to raise some funds to closing its doors over a frantic 48-hour period . Bank stocks plummeted on contagion concerns, with shares of regional lenders getting hit the hardest. Recently, New York Community Bancorp’s financial troubles reminded the market of the risks still out there for regional banks. NYCB shares suffered a slew of bad news since the start of 2024 when management disclosed a surprise fourth-quarter loss. A leadership shakeup and Moody’s slashing the bank’s credit rating to junk status didn’t help. In a glimmer of hope, NYCB announced last week an over $1 billion capital injection from investors, led by former Treasury Secretary Steven Mnuchin’s Liberty Strategic Capital, and shares recovered a bit. The stock, however, dropped nearly 5% on Monday and remained 68% lower year to date. Unlike 2023’s SVB-induced volatility, the troubles at NYCB have not tanked the entire banking industry. The KBW Bank Index was still up 3.5% year-to-date, with many names outperforming, including Wells Fargo. WFC YTD mountain Wells Fargo (WFC) year-to-date performance While seeing a nice climb in the final months of 2023, shares of Wells Fargo have gained 15% since the start of 2024 — making the stock a top performer among major U.S. banks. Over the same stretch, the S & P 500 rose nearly 7.3%. Wells Fargo shares got a big boost after a key win with regulators in mid-February. Days later, the Club trimmed its Wells Fargo position to lock in some profits and to right-size its weighting in the portfolio, which had swelled to nearly 5%. The stock has since hit a 52-week high last Thursday. It’s only fractionally below that level on Monday. The recent leg higher started when Wells Fargo shares shot up more than 7% on Feb. 15 after the Office of the Comptroller of the Currency (OCC) lifted a big penalty related to its 2016 sales practice misconduct. Investors cheered because the regulatory news signaled that Wells Fargo could be one step closer to the Federal Reserve lifting the bank’s $1.95 trillion asset cap , which has been in place for over six years. The February OCC action was believed to be a big reason why the Fed’s balance sheet restrictions were first enforced. “That’s why I think investors really gravitated or rallied around this one getting lifted. Because even though they’ve already had a number of them lifted — and still have many more to go — this was kind of at the heart of the matter for them,” Scott Siefers, Piper Sandler senior banks analyst, told CNBC on Friday. “I think, at least psychologically, it led investors to believe ‘Okay, we’re finally getting closer to the finish line.’” Since Charlie Scharf took over as Wells Fargo CEO in 2019, the bank has cleared six of these consent orders. In a recent Club analysis , we found that these regulatory updates were overall positive for the stock over the past five years. However, a lifting of the Fed’s asset cap is the big one. It would allow Wells Fargo to finally grow its assets again and help rake in more profits. The bank would be able to write more loans, take in more customer deposits, and explore other lines of business. That’s why all strategic attempts to appease regulators are welcome news for shareholders. To be sure, though, the Club largely sees any lifting of the Fed’s asset cap as more of a 2025 story. MS YTD mountain Morgan Stanley (MS) year-to-date performance Conversely, the Club’s other bank stock, Morgan Stanley , has been lagging in 2024 — down 7% year to date. While making made a mysterious 4% push higher on March 4, the Club made a small sale the next day because no specific catalyst could be identified. Such a big move in the absence of any news tends to be unsustainable. The stock has dropped since then. Morgan Stanley’s underperformance was first spurred by a post-earnings slump in January when the firm disappointed shareholders with weak wealth management guidance. Management said at the time the bank was far from hitting management’s previously-held goal of 30% operating margins for the division. “When you get this kind of cautious commentary from a new CEO, my gut says [Ted Pick] is simply trying to lower expectations” to play the under promise, over deliver game, Jim Cramer said following the earnings release. “Plus, Morgan Stanley’s paying you to wait with that 4% yield, and they’re right in there buying with you thanks to their aggressive buyback.” The Club also still sees green shoots for the Wall Street behemoth’s long-dormant investment banking business. While IB was once a very profitable segment of Morgan Stanley, an uncertain macro environment and recession concerns have weighed on the overall deal-making environment — both in companies going public and in mergers and acquisitions activity. This month is a big one on the IPO front for Morgan Stanley, which is among the lead underwriters of the upcoming Reddit offering. It’s not only a high-profile deal with a lot of exposure for Morgan Stanley’s IB division, but the social media company is targeting a big valuation close to $6.5 billion. If the Morgan Stanley places the IPO correctly, Jim said there could be upside for the bank stock. In a Monday filing, Reddit said it aims to price shares in a range of $31 to $34 each in hopes of raising about $750 million. (Jim Cramer’s Charitable Trust is long WFC, MS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
A combination file photo shows Wells Fargo, Citibank, Morgan Stanley, JPMorgan Chase, Bank of America and Goldman Sachs.
Reuters
It’s been a year this week since the collapse of Silicon Valley Bank sent shockwaves through the banking sector. While the crisis most directly affected the regionals, major U.S. financial institutions for most of 2023 also found their stocks under assault. Big banks, like Club holding Wells Fargo, were largely able to turn the corner. The question is still out on the smaller lenders.
Former U.S. Treasury Secretary and Liberty Strategic Capital founder and managing partner Steven Mnuchin joins ‘Squawk on the Street’ to discuss the firm’s investment in New York Community Bancorp as part of a $1 billion capital injection into the struggling regional bank, the bank’s loan portfolio, whether this will be a long-term investment for Mnuchin, and more.
New York Community Bank said Thursday it lost 7% of its deposits in the turbulent month before announcing a $1 billion-plus capital injection from investors led by former Treasury Secretary Steven Mnuchin’s Liberty Strategic Capital.
The bank had $77.2 billion in deposits as of March 5, NYCB said in an investor presentation tied to the capital raise. That was down from $83 billion it had as of Feb. 5, the day before Moody’s Investors Service cut the bank’s credit ratings to junk.
NYCB also said it’s slashing its quarterly dividend for the second time this year, to 1 cent per share from 5 cents, an 80% drop. The bank paid a 17-cent dividend until reporting a surprise fourth-quarter loss that kicked off a negative news cycle for the Long Island-based lender.
Before announcing a crucial lifeline Wednesday from a group of private equity investors led by Mnuchin’s Liberty Strategic Capital, NYCB’s stock was in a tailspin over concerns about the bank’s loan book and deposit base. In a little more than a month, the bank changed its CEO twice, saw two rounds of rating agency downgrades and announced deepening losses.
At its nadir, NYCB’s stock sank below $2 per share Wednesday, down more than 40%, before ultimately rebounding and ending the day higher. The shares climbed 10% in Thursday morning trading.
The capital injection announced Wednesday has raised hopes that the bank now has enough time to resolve lingering questions about its exposure to New York-area multifamily apartment loans, as well as the “material weaknesses” around loan review that the bank disclosed last week.
Mnuchin told CNBC in an interview Thursday that he started looking at NYCB “a long time ago.”
“The issue was really around perceived risks in the loans, and with putting billion dollars of capital into the balance sheet, it really strengthens the franchise and whatever issues there are in the loans we’ll be able to work through,” Mnuchin told CNBC’s “Squawk on the Street.”
“I think there’s a great opportunity to turn this into a very attractive regional commercial bank,” he added.
Mnuchin said that he did “extensive diligence” on NYCB’s loan portfolio and that the “biggest problem” he found was its New York office loans, though he expected the bank to build reserves over time.
“I don’t see the New York office working out or getting better in the future,” Mnuchin said.
Incoming CEO Joseph Otting, a former comptroller of the currency, told analysts Thursday that the bank would look to strengthen its capital and liquidity levels and reduce its concentration in commercial real estate loans.
NYCB will likely have to sell assets as well as build reserves and take write-downs, according to Piper Sander analysts led by Mark Fitzgibbon.
The bank, which has $116 billion in assets, is evaluating whether it should reduce assets to below the key $100 billion threshold that brings added regulatory scrutiny on capital and risk management, executives said Thursday.
When asked by an analyst about the feared exit of deposits after ratings agency downgrades, NYCB Chairman Alessandro DiNello said the bank got “waivers” that allowed it to keep custodial accounts that otherwise may have fled.
“Now I think given this capital raise, we’re hopeful that that relationship continues to be the way it is,” DiNello said.
While news of the Mnuchin investment is good for regional banks overall, Wells Fargo analyst Mike Mayo cautioned that the cycle for commercial real estate losses was just beginning as loans come due this year and next, which will probably cause more problems for lenders.
— CNBC’s Laya Neelakandan and Ritika Shah contributed to this report.
Correction: New York Community Bank announced an investment from a group of private equity investors on Wednesday. An earlier version of this story misstated the day.
Hosted by Brian Sullivan, “Last Call” is a fast-paced, entertaining business show that explores the intersection of money, culture and policy. Tune in Monday through Friday at 7 p.m. ET on CNBC.
Chris McGratty, KBW Head of Bank Research, joins ‘Fast Money’ to talk NYCB’s recent cash infusion to help it stay afloat and what he expects to see from the bank moving forward.
Federal Reserve Chair Jerome Powell fist-bumps former Treasury Secretary Steven Mnuchin after a House Financial Services Committee hearing on “Oversight of the Treasury Department’s and Federal Reserve’s Pandemic Response” in the Rayburn House Office Building in Washington, D.C., on Dec. 2, 2020.
Greg Nash | Reuters
The $1 billion-plus injection that New York Community Bank announced Wednesday is the latest example of private equity players coming to the need of a wounded American lender.
Led by $450 million from ex-Treasury Secretary Steven Mnuchin’s Liberty Strategic Capital, a group of private investors are plowing fresh funds into NYCB. The move soothed concerns about the bank’s finances, as its shares closed higher on Wednesday after a steep decline earlier in the day.
That cash infusion follows last year’s acquisition of PacWest by Banc of California, which was anchored by $400 million from Warburg Pincus and Centerbridge Partners. A January merger between FirstSun Capital and HomeStreet also tapped $175 million from Wellington Management.
Speed and discretion are key to these deals, according to advisors to several recent transactions and external experts. While selling stock into public markets could theoretically be a cheaper source of capital, it’s simply not available to most banks right now.
“Public markets are too slow for this kind of capital raise,” said Steven Kelly of the Yale Program on Financial Stability. “They’re great if you are doing an IPO and you aren’t in a sensitive environment.”
Furthermore, if a bank is known to be actively raising capital before being able to close the deal, its stock could face intense pressure and speculation about its balance sheet. That happened to Silicon Valley Bank, whose failure to raise funding last year was effectively its death knell.
On Wednesday, headlines around noon that NYCB was seeking capital sent its shares down 42% before trading was halted. The stock surged afterward on the news that it had successfully raised funding.
“This is the unfortunate lesson from SVB,” said an advisor on the NYCB transaction. “With private deals, you can talk for a while, and we almost got to the finish line before there was any publicity.”
Mnuchin reached out to NYCB directly to offer support amid headlines about the duress it was under, according to a person with knowledge of the matter. Mnuchin isn’t just a former Treasury secretary. In 2009, he led a group that bought California bank IndyMac out of receivership. He ultimately turned the bank around and sold it to CIT Group in 2015.
Now, with the assumption that Mnuchin and his co-investors have seen NYCB’s deposit levels and capital situation — and are comfortable with them — the bank has much more time to resolve its issues. Last week, NYCB disclosed “material weaknesses” in the way it reviewed its commercial loans and delayed the filing of a key annual report.
“This buys them a ton of time. It means the FDIC isn’t coming to seize them on Friday,” Kelly said. “You have a billion dollars in capital and a huge endorsement from someone who has seen the books.”
Struggling New York Community Bancorp announced a $1 billion capital raise and a leadership shakeup on Wednesday, headlined by former Treasury Secretary Steve Mnuchin.
Reuters and The Wall Street Journal reported earlier Wednesday that the bank was looking to outside investors for cash to shore up its balance sheet. The stock was halted for news pending when shares were down 42%.
Shares of NYCB fell sharply on Wednesday.
Shares of the bank were already down sharply the day before the reports. The stock is now below $2 per share after starting the year above $10.
A cash infusion would be the latest development in a turbulent start to the year for NYCB. The bank disclosed in late January that it was dramatically raising the allowance for potential loan losses on its balance sheet, with its exposure to commercial real estate being a potential issue. That was followed shortly by Moody’s Investors Service downgrading the bank’s credit rating to junk status, and NYCB naming former Flagstar bank CEO Alessandro DiNello as executive chairman.
Then last week, NYCB disclosed that it had “identified material weaknesses in the company’s internal controls related to internal loan review” and announced that DiNello was taking over as CEO.
The questions surrounding NYCB are reminiscent of those that swirled around Silicon Valley Bank, Signature Bank and First Republic before all three failed in the spring of 2023. They were among several regional banks that struggled as higher interest rates pushed down the value of older Treasury holdings and led some depositors to move their accounts elsewhere.
With the U.S. economy continuing to show surprising strength and inflation still above the Federal Reserve’s 2% target, traders have been dialing back expectations for interest rate cuts this year. The higher-for-longer rate environment could keep pressure on the banks themselves and on commercial real estate, which is a key business for NYCB and many other regional lenders.
The struggles for NYCB may have caught regulators off guard as well as investors. The regional lender acquired much of Signature Bank out of receivership from the Federal Deposit Insurance Corporation last March.
A sign is pictured above a branch of the New York Community Bank in Yonkers, New York, U.S., January 31, 2024.
Mike Segar | Reuters
Regional lender New York Community Bank may have to pay more to retain deposits after one of the company’s key ratings was slashed for the second time in a month.
Late Friday, Moody’s Investors Service cut the deposit rating of NYCB’s main banking subsidiary by four notches, to Ba3 from Baa2, putting it three levels below investment grade. That followed a two-notch cut from Moody’s in early February.
The downgrade could trigger contractual obligations from counterparties of NYCB that require the bank to maintain an investment grade deposit rating, according to analysts who track the company.
NYCB finds itself in a stock freefall that began a month ago when it reported a surprise fourth-quarter loss and steeper provisions for loan losses. Concerns intensified last week after the bank’s new management found “material weaknesses” in the way it reviewed its commercial loans. Shares of the bank have fallen 72% this year, including an 19% decline Monday, and now trade hands for less than $3 apiece.
Of key interest for analysts and investors is the status of NYCB’s deposits. Last month, the bank said it had $83 billion in deposits as of Feb. 5, and that 72% of those were insured or collateralized. But the figures are from the day before Moody’s began slashing the bank’s ratings, sparking speculation about possible flight of deposits since then.
The Moody’s ratings cuts could impact funds in at least two areas: a “Banking as a Service” business with $7.8 billion in deposits as of a May regulatory filing, and a mortgage escrow unit with between $6 billion to $8 billion in deposits.
“There is potential risk to servicing deposits in the event of a downgrade,” Citigroup analyst Keith Horowitz said in Feb. 4 research note. NYCB executives told Horowitz that the deposit rating, which Moody’s had pegged at A3 at the time, would have to fall four notches before being at risk. It has fallen six notches since that note was published.
During a Feb. 7 conference call, NYCB CFO John Pinto confirmed that the bank’s mortgage escrow business needed to maintain an investment grade status and said that deposit levels in the unit fluctuated between $6 billion and $8 billion.
“If there’s a contract with these depositors that you have to be investment grade, theoretically that would be a triggering event,” KBW analyst Chris McGratty said of the Moody’s downgrade.
NYCB didn’t immediately return calls or an email seeking comment.
It couldn’t be determined what the contracts force NYCB to do in the event of it breaching investment grade status, or whether downgrades from multiple ratings firms would be needed to trigger contractual provisions.
To replace deposits, NYCB could raise brokered deposits, issue new debt or borrow from the Federal Reserve’s facilities, but they would all probably come at a higher cost, McGratty said.
“They will do whatever it takes to keep deposits in house, but as this scenario is playing out, it may become more cost prohibitive to fund the balance sheet,” McGratty said.
This story is developing. Please check back for updates.
Brian Hughes, former chief risk officer at Discover, joins ‘The Exchange’ to discuss what may have gone wrong in New York Community Bank’s internal review, how newly-proposed transparency rules can make banking safer, and more.
CNBC’s Leslie Picker joins ‘Halftime Report’ to discuss the latest news on New York Community Bank as shares plunge. The Investment Committee discuss the regional bank names.
A sign is pictured above a branch of the New York Community Bank in Yonkers, New York, U.S., January 31, 2024.
Mike Segar | Reuters
Regional lender New York Community Bank finds itself in an apparently worsening predicament just as the anniversary of last year’s banking turmoil nears.
The most worrying development, though, is directly tied to investors’ fears about commercial real estate and shortfalls the bank reported in a key aspect of its business: NYCB said that poor oversight led to “material weaknesses” in the way it reviewed its portfolio of loans.
The disclosure is a “significant concern that suggests credit costs could be higher for an extended period,” Raymond James analyst Steve Moss said Thursday in a research note. “The disclosures add to our concern about NYCB’s interest-only multi-family portfolio, which may require a long workout period unless interest rates decline.”
In a remarkable reversal of fortunes, a year after deposit runs consumed regional lenders including Silicon Valley Bank, NYCB — one of the perceived winners from that period after acquiring a chunk of the assets of Signature Bank following government seizure — is now facing existential questions of its own.
The bank’s trajectory shifted suddenly a month ago after a disastrous fourth-quarter report in which it posted a surprise loss, slashed its dividend and shocked analysts with its level of loan loss provisions.
Days later, ratings agency Moody’s cut the bank’s credit ratings two notches to junk on concerns over the bank’s risk management capabilities after the departure of NYCB’s chief risk officer and chief audit executive.
At the time, some analysts were comforted by the steps NYCB took to shore up its capital, and noted that the promotion of former Flagstar CEO Alessandro DiNello to executive chairman boosted confidence in management. The bank’s stock was briefly buoyed by a flurry of insider purchases indicating executives’ confidence in the bank.
DiNello became CEO as of Thursday after his predecessor stepped down.
Now, some are questioning the stability of NYCB’s deposits amid the tumult. Last month, the bank said it had $83 billion in deposits as of Feb. 5, a slight increase from year-end. Most of those deposits were insured, and it had ample resources to tap if uninsured deposits left the bank, it said.
“NYCB still has not provided an update on deposits, which we can only infer … are down,” D.A. Davidson analyst Peter Winter said Thursday in a note.
“The question is, by how much?” Winter asked. “In our view, corporate treasurers were reassessing if they are going to keep deposits at NYCB when their debt rating was downgraded to junk.”
In a statement released Friday announcing a new chief risk officer and chief audit executive, NYCB CEO DiNello noted that he had identified the weaknesses disclosed Thursday and is “taking the necessary steps to address them.” The bank’s allowance for credit losses isn’t expected to change, he added.
“The company has strong liquidity and a solid deposit base, and I am confident we will execute on our turnaround plan,” DiNello said.
The pressure on NYCB’s operations and profitability amid elevated interest rates and a murky outlook for loan defaults has raised questions as to whether NYCB, a serial acquirer of banks until recently, will be forced to sell itself to a more stable partner.
Ben Emons, head of fixed income for NewEdge Wealth, noted that banks trading for less than $5 a share are perceived by markets as being at risk for government seizure.
A NYCB representative didn’t immediately return a request for comment.
For now, the concern seems to be limited to NYCB, where commercial real estate makes up a greater proportion of loans compared with some rivals. While NYCB stock notched a 52-week low of $3.32 per share on Friday, other bank indexes saw only slight declines.
“We expect more questions on whether NYCB will sell,” Citigroup analyst Keith Horowitz said in a note. “But we do not see a lot of potential buyers here even at this price due to the uncertainty … in our view, NYCB is on its own.”
— CNBC’s Tom Rotunno and Michael Bloom contributed to this story.
