New problems for commercial banking in America?

Analysts and investors are again expressing concerns about commercial banking in the United States. This time, it’s New York Community Bank (NYCB) that’s setting off alarm bells. This is a bank that acquired part of Signature Bank after problems arose in the industry almost a year ago. Last week, NYCB announced record profits of $2.374 billion, representing a 265% year-on-year increase.

However, despite its strong figures for the year (which were partly due to its purchase of Signature Bank’s assets), it posted a fourth-quarter loss of $252 million, caused by its exposure to commercial real estate. In addition, the bank announced a loan-loss provision of $552 million, compared to a forecast of $45 million. This was interpreted as reflecting a higher level of payments in arrears, raising another red flag. The markets wasted no time in punishing the bank, which saw its stock price plunge by almost 40% on the same day those results were announced, then by another 13% the following day.

Not long after, Aozora Bank reported losses related to the United States commercial real estate sector, with the market reaction in this case producing a price drop of more than 20%. At the aggregate level, bank stock prices have fallen by about 5% in recent days, as reflected in the KWB Bank index, which tracks American banks. However, if we look back to February 2023, before Silicon Valley Bank (SVB) went bust, we actually see a decrease of 18%.

It seems as though the ghost of the banking crisis has returned again, although like last year, it doesn’t seem as though these problems will spread to the rest of the economy. What is different this time, however, is the cause of the turbulence. In this case, the real estate sector is now in the spotlight, as analysts, as well as NYCB, point to an increase in late payments.

According to a report released by JPMorgan Chase, commercial real estate loans represent about 30% of the assets held by small banks, compared to just 6.5% for large banks. That report also states that a “significant” portion of that percentage will need to be refinanced over the next few years, which in turn “increases difficulties for borrowers in a rising interest rate environment.”

Furthermore, there are a whole series of risks still affecting this subsector, such as the effects of hybrid work schedules and the increasing popularity of e-commerce, which is especially impacting warehouses and other logistics-oriented buildings. However, JPMorgan Chase specifically mentions office buildings as a type of asset facing a variety of special challenges. Although NYCB has more exposure to residential properties, it also inherited a significant portfolio of commercial loans from Signature Bank.

Almost one year since the fall of SVB

Silicon Valley Bank (SVB) was the first bank to experience problems in 2023, largely due to its specialization in financing for startups. It was also strongly affected by the aggressive interest rate hikes seen during the last two years, which devalued its bond portfolio. Other regional American banks also began to experience turbulence, which caused havoc in the markets, eventually having an impact on the entire banking sector. For example, First Republic, which was the fourth bank to experience problems last year, saw its stock price drop by 49% after posting a 33% drop in profits, to $269 million, which took place in tandem with withdrawal of 58% of its deposits, equivalent to $102 billion.

Alberto Matellán, Head Economist at MAPFRE Inversión, explained at the time that this negative reaction was due more to the context than to any financial realities. “This is not especially good news or bad news either. However, the context is not especially favorable,” he said.

In Europe, banking giant Credit Suisse was the most heavily affected by banking turbulence, after admitting that it had found “material weaknesses” in its financial reporting. When combined with all of the problems being experienced in America with commercial banking, this caused a loss of confidence and a mass withdrawal of deposits. For now, however, there do not appear to be signs of trouble at any European banks.

Volatility levels in the finance sector decreased rapidly after the collapse of Credit Suisse, although in June of last year, María Torres de Becerril, Manager of Equity Investments at MAPFRE AM, was already warning that from the perspective of regulation and falling confidence levels, “we will continue to see” the collateral effects of those problems.

“Investors have not yet regained their confidence in the banking sector, and the risk premium levels that continue to affect trading of bank stocks are evidence of this. We haven’t yet seen a return to the discount rates that existed prior to March, when the crisis with the American regional banks occurred,” she explained. Since then, prices for bank stocks seem to have recovered. In many cases, this has been spurred on by the posting of record profits thanks to the persistence of higher interest rates, and the finance sector seems to have regained its status as a favorite for many asset managers.

What should we expect from the central banks?

The problems experienced by American commercial banking in 2023 did not go unnoticed by the Federal Reserve (Fed), which ended up injecting almost $165 billion in liquidity into the banking sector, or by the Swiss National Bank either, which loaned Credit Suisse 50 billion Swiss francs, although in the end this did not prevent its sale to UBS. For the time being, we’ll simply have to wait to see how serious this new situation becomes, and whether there is really a risk of contagion for other banks.