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NYCB's struggles: A warning sign for broader banking crisis?

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Commercial real estate has taken a dive but so have banks with exposure to the sector, so could this spark a broader banking crisis?

Shares in US lender New York Community Bancorp (NYCB) have been hurtling downward for some time, sparked by the fall in value of commercial real estate.

This week proved challenging for NYCB as its stock experienced a significant 23 per cent decline, reaching its lowest point since 1996. The decline was fuelled by the confirmation of a new CEO and the acknowledgment of "material weaknesses" in company controls, contributing to a reported loss of US$2.4 billion for shareholders.

Adding to the lender's woes, Fitch Ratings recently downgraded the quality of NYCB's debt to junk, following a similar move by Moody's. These developments compounded the challenges faced by the financial institution, further impacting its standing in the market.

Before these challenges unfolded, NYCB exacerbated its troubles by postponing the release of its annual financial disclosure, a move that market observers likened to the situation faced by First Republic Bank last year.

Year to date, shares of NYCB are down over 70 per cent.

US regulators are reportedly closely watching rising delinquencies in commercial real estate, with Treasury Secretary Janet Yellen highlighting last week the stress on property owners due to the higher interest rate environment, making refinancing challenging with less favourable terms.

“I’m concerned. I believe it's manageable although there may be some institutions that are quite stressed by this problem,” Yellen said.

Speaking to InvestorDaily on Tuesday, AMP’s Shane Oliver said that this situation highlights the ongoing risks around bank exposures to commercial property.

Namely, commercial property prices have experienced significant declines in most advanced economies over the past year or two. Last year, the Reserve Bank of Australia (RBA) estimated a roughly 10 per cent decline in Australia, while the US is said to be at 20 per cent.

In September, the RBA acknowledged in a paper that global commercial real estate (CRE) markets are facing challenges with weakened leasing demand and higher interest rates impacting loan servicing and asset values. The central bank explained that while systemic risks are reduced globally due to improved lending standards post the global financial crisis, higher risks persist in the US and Sweden, whereas Australian CRE markets, facing similar challenges, maintain lower systemic risks with reduced bank exposures and tighter lending standards.

At the time, the RBA also warned that while a tightening of lending standards "at this point in the cycle" can reduce risks for lenders and the financial system in the future, it can increase near-term risks.

"This is because tighter lending standards make it more difficult for borrowers to meet minimum leverage and serviceability standards on a loan when refinancing is due. Indeed, combined with falling income and valuations, more borrowers could face a funding gap when refinancing. If these constrained borrowers are unable to refinance and are forced to sell their CRE assets, valuations could fall even further than implied by weak fundamentals, constraining even more borrowers," the bank said.

The RBA also cited a deteriorating in the quality of CRE loans in the US, but added that “there have been limited signs of financial stress among owners of Australian CRE”. But, despite this, it also warned that stress could spill over from overseas markets to Australia.

"Even if developments in domestic CRE markets remain relatively orderly, there is a possibility that stresses in overseas CRE markets could spill over to affect the Australian CRE market through common ownership and funding sources," it said.

"Widespread financial stress among owners of CRE overseas could increase the risk of a disorderly fall in domestic valuations if (realised or unrealised) losses on foreign assets force owners to sell and lead lenders to reduce lending to the Australian CRE market. Indeed, global CRE prices have become more correlated since the GFC."

Looking at NYCB today, Dr Oliver pointed out that since some of the lender's issues are unique to the bank, such as its elevated exposure to rent-regulated US apartments, it is plausible that other banks may not be confronted with a similar predicament, including those based in Australia.

“It [NYCB] is now facing tougher regulations having gone through $100 billion in assets and issues with its internal controls so it may not be indicative of issues at other US banks,” Dr Oliver said.

"Also large US banks tend to have a low exposure to commercial property as do most Australian banks."

Fears for the banks with strong ties to CRE are not new, with questions arising last year regarding the possibility that commercial property would be the next penny to drop after a slide in tech stock sent banks spiralling in early 2023.

At the time, Dr Oliver told InvestorDaily that uncertainty in the commercial property space was still threatening to undermine the viability of highly exposed institutions.

“The property market was a key beneficiary of the shift to ultra-low interest rates and bond yields in the decades prior to the pandemic, and that continued into the pandemic, but that’s now reversing,” he told InvestorDaily.

At the time, NYCB was cited as a bank to watch after it absorbed assets managed by local peer Signature Bank, which famously collapsed in March last year.

Other highly exposed regional banks were said to be M&T Bank, Comerica, and Zions Bancorp who had borne the brunt of weakening investor confidence. As such, Dr Oliver remarked at the time that "it’s way too early to say the banking crisis is over or the banking stress is over".

Reflecting on the current situation, he is a little more optimistic.

"While office property values will continue to fall and cause problems for some lenders which could yet trigger a crisis, the risks may not be as broad based as feared by some," Dr Oliver concluded.