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Nearly a year after a string of regional bank failures rattled markets, concerns about the health of regional banks have bubbled back up.
Those fears reemerged earlier this week when New York Community Bancorp--the financial insitution that acquired Signature Bank's assets when it was shuttered by regulators in March--reported disappointing fourth quarter earnings. The Hicksville, New York-based bank posted a fourth quarter net loss of $252 million and slashed its dividend to shore up its balance sheet. The company's shares plummeting by as much as 38 percent in one day, the worst trading day ever for the bank, and pulled down the KBW Regional Bank Index by 6 percent, the largest single-day decline for the index since the collapse of Signature Bank in March 2023.
Regional banks' exposure to commercial real estate is making investors nervous. The data company Trepp forecasts that $544.3 billion in commercial mortgage loans will come due this year, with another $533.2 billion predicted to mature in 2025. Not all of those are likely to get paid. The credit rating agency Fitch projects loan delinquencies of commerical mortgage to double this year, from 2.25 percent this past November to 4.5 percent in 2024 and 4.9 percent in 2025.
Commercial real estate has been battered by higher interest rates and work-from-home's staying power. The return-to-office push has plateaued. Only 38 percent of U.S. companies require employees to be in the office five days a week, according to data from the hybrid work software company Scoop Technologies. Instead, most companies have settled on a hybrid approach with two to three days of in-person work.
That's not just bad news for office buildings and landlords. Even entrepreneurs operating fully remote companies could feel some pain from a commercial real estate crash. That's because an industry downturn would ripple out into other sectors of the economy, starting with the go-to lenders for two-thirds of business owners: small and regional banks. Compared with the country's biggest banks, smaller banks are more than four times as exposed to the commercial real estate sector, according to a report published by JPMorgan back in April. With CRE loans accounting for 28.7 percent of assets at smaller banks, JPMorgan said those fears are somewhat justified.
"The office sector isn't likely, in isolation, to be a significant source of GDP weakness. But broader and legitimate concerns about confidence in the banking system are relevant, especially questions about smaller banks and the credit they provide to the broader economy," wrote JPMorgan's Joe Seydl, Jay Serpe, and Ryan Asato in the report. "Tighter lending standards and profitability challenges in the banking sector could reduce available financing and raise the cost for small and medium sized businesses."
It's yet another risk tacked on to an already tricky credit environment for entrepreneurs. Venture funding has fallen to its lowest levels in five years, according to Crunchbase, while banks have tightened lending standards, especially for small businesses. If any regional banks collapse under the weight of commercial real estate loan losses, that would make obtaining capital even more difficult.
Still, entrepreneurs shouldn't start hiding their money under their mattress just yet. Regulators responded swiftly to the three bank failures last year, preventing any further contagion. Plus, a commercial real estate crash is not guaranteed. As JPMorgan cautioned in its report, not every office market is as troubled as San Francisco or Chicago. Mid-major cities like Miami and Raleigh, North Carolina, where office attendance is higher, are in better shape as are the newer, more premium office buildings, which have proved much more attractive to companies looking for leases. And ultimately, if a crisis does materialize, it will be a slow-moving one.
"The tightening of credit availability and higher rates will spell trouble for some borrowers," JPMorgan said. "But importantly, it will likely take many years to play out."
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New York Community Bancorp Reignites Fears Over Regional Banks
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03.02.2024
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Nearly a year after a string of regional bank failures rattled markets, concerns about the health of regional banks have bubbled back up.
Those fears reemerged earlier this week when New York Community Bancorp--the financial insitution that acquired Signature Bank's assets when it was shuttered by regulators in March--reported disappointing fourth quarter earnings. The Hicksville, New York-based bank posted a fourth quarter net loss of $252 million and slashed its dividend to shore up its balance sheet. The company's shares plummeting by as much as 38 percent in one day, the........
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