New York Community Bancorp isn't the only bank to be wary of U.S. office loans

Shares of New York Community Bancorp rose sharply on Thursday, hitting a multi-year low before recovering.

Despite defensive arguments from Wall Street bank analysts, the bank's surprise loss and sharp increase in reserves dragged down regional bank stocks for a second day.

Shares of NYCB were down 3% at $6.28 by mid-day Thursday, the stock's biggest one-day drop after a 38% decline on Wednesday. The lender took half a billion in reserves against loan losses, a move analysts believe was prompted by regulators. Ratings agency Moody's put the bank's credit rating on review for downgrade on Wednesday.

Wall Street reviewed its stock ratings as traders recalled last year's regional banking crisis. Raymond James and Jefferies downgraded the stock to hold equivalent. However, JP Morgan said the sell was “overweight” and maintained a buy rating, with NYCB a top pick for 2024; That lowered NYCB's price target to $11.50—which represents a 78% upside to Wednesday's closing price of $6.47—from its previous target of $14.

Barometers such as the SPDR S&P Regional Bank ETF fell 3% on Wednesday and then 2.5% by Thursday afternoon as investors and analysts digested the decline.

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Other regional banks' loan portfolios are also scoured by analysts for anything regulators deem desirable.

JPMorgan's Kabir Gabrihan wrote on Thursday that we don't expect a rebound in 2023, noting that office real estate loan portfolios are lower than most peers at two banks: Zions Bancorp and M&T Bank.

At year-end, loss reserves on office properties were 3.8% at Geones and 4.4% at M&T, according to analyst estimates, and 8% at Community Bank of New York after this week's accrual.

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Shares of Zions and M&T were each down 4% Thursday afternoon. They did not immediately respond to questions about the JP Morgan analysis.

Other regional banks in decline Thursday included Western Alliance Bancorp and Eagle Bancorp

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6% and 4% discount respectively.

A second bank warned overnight on its US office loans.

Japan's Azora Bank expects a net loss for the fiscal year due to higher provisions for US office loans. That was a sharp revision to a loss of 28 billion yen ($190.5 million), from an earlier forecast of a profit of 24 billion yen. The stock fell 21% on Thursday.

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“Due to high US interest rates and the shift to remote work accelerated by Covid-19, the US office market continues to face adverse conditions coupled with extremely tight liquidity,” the bank said in a statement.

The bank said it may take a couple of years for the market to stabilize.

It expects to post a 41 billion yen loss on its securities portfolio in the second half of the fiscal year ending March 31, mainly due to foreign bonds and higher US interest rates again.

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Azora's update comes hours after NYCB's move to cut its dividend and increase its loan-loss reserves by half a billion dollars could spread further concerns across the sector.

“There are plenty of reasons to be concerned about the health of U.S. banks, particularly small banks,” Kavegal Research economists Will Denier and Dan Kai Qian said in a note on Thursday.

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“Property quality is deteriorating. “US commercial real estate is in a slow-moving train wreck,” they noted, with smaller banks particularly exposed. Large unrealized losses from bond sales in 2022-23 remain a concern, and higher money market rates are taking money out of deposits.

New York Community Bank shares received a downgrade from Raymond James analyst Steve Moss, though he changed his rating from strong buy to market perform. “Results put stakes in the penalty box [there’s] Greater clarity around capital, credit and future business plans,” he said.

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Bank of America

Ibrahim H. Poonawala reiterated his buy rating on the New York community, but expressed his surprise at the bank's drastic actions.

“While we expected a certain level of reserve build-up with the impact of higher interest rates on its commercial real estate (CRE) borrowers,” Poonawalla wrote Thursday, “what surprised us most was the urgency with which bank regulators required NYCB to increase liquidity/capital/loan reserves. , to better align the bank's metrics with larger regional peers.”

Write to Callum Keown at [email protected]

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