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Last spring saw a selloff in regional bank stocks as several smaller banks failed, starting with Silicon Valley Bank. The situation ultimately cooled down, but we always had a sense that while the situation was contained, there could be flare-ups in the form of one or a few individual banks that came under pressure. In late January, concerns about a regional bank crisis were reignited when New York Community Bank (NYCB) revealed that its earnings were well below expectations. While we’re seeing an impact on the stock prices of some regional banks in the U.S. – and globally – we believe these problems remain isolated, contained to a small portion of the smaller banks.
Most of New York Community Bank’s issues are rather unique. Its problems stem partly from its acquisition of Signature Bank’s assets last spring when that bank failed; that put NYCB into a different bank category – Category IV (assets over $100 billion) – which means greater regulation in general, including higher capital, liquidity, and loan loss requirements.
NYCB’s decision to strengthen its balance sheet liquidity in line with its peer group was an important contributor to the earnings miss and the dividend cut. Also, the bank, which has a relatively high exposure to commercial real estate, wrote off some distressed loans in the fourth quarter – although two loans with special circumstances accounted for much of the charge-offs in the period.
Investors are clearly worried about NYCB, sending its stock price down dramatically since the earnings announcement, although it has stabilized in the last several trading days. NYCB does have a relatively low Tier 1 capital ratio; it is under 10% versus 12.3% on average for U.S. banks.1 On the positive side, NYCB has a relatively higher percentage of insured deposits, which means less flight risk for deposits, and its underlying operating performance was strong. Finally, the departure of senior executives may point to issues that could be specific to NYCB.
Because of NYCB’s woes, a reverse halo effect, not dissimilar to last spring, has started to impact regional banks in the U.S. – and globally. The S&P 500 Regional Banks Index has fallen 8.9% year-to-date.2 U.S. regional bank bonds have experienced widening spreads, indicating that markets view them as riskier. But in our view, there is only a small subset of U.S. regional banks that have material vulnerabilities. It is their stocks that are being most punished by investors.
The reality is that, in general, U.S. banks are well-capitalized. Based on the latest aggregate sector balance sheet data by the U.S. Federal Reserve (Fed), there is enough cash to cover commercial real estate loans in their entirety.3 The issue is that generally speaking, the smaller banks have more of the loans and the larger banks have more of the cash, which explains the recent weakness in some regional bank stocks.
In fact, in the last six months, the percentage of total assets that are high quality liquid assets has increased for large banks and decreased for smaller banks.4 However, many of the issues that have created stress for New York Community Bank are unique to that bank.
In mid-February, concerns spread outside the U.S. However, this again appears to be limited to a small group of banks that have substantial exposure to U.S. commercial real estate – for which their stock prices may be getting unfairly punished. The European Central Bank is nevertheless on alert with regard to commercial real estate and has reportedly warned banks about managing commercial real estate risks and bolstering their capital.
But what about U.S. commercial real estate itself? There are three key points to keep in mind:
In short, we believe bank problems remain isolated, contained to a small portion of smaller banks. We could see issues arising for a few individual banks periodically as long as we remain in a higher interest rate environment, even if the sector is profitable and stable in aggregate. Also, our base case of a “bumpy landing” followed by a reacceleration of economic growth in the U.S. could imply higher loan growth and an improving ability of borrowers to service debts. And the eventual start of easing in monetary policy could also support growth, while reducing the pressure in net interest margins, by reducing the need to increase deposit rates.
Perhaps the strongest signal that the overall market isn’t worried about commercial real estate is that the recent headlines didn’t stop the S&P 500 Index from closing above 5,000 for the first time ever on Feb. 9.9 You may recall that the S&P 500 only hit 2,500 in September 2017.10 Given all the challenges between then and now, it’s clear stocks really climbed a “wall of worry.”
This serves as a reminder of the importance of remaining invested (and well-diversified) for the long run, rather than getting unnerved by headlines. (And the S&P 500 wasn’t the only recent milestone. Japan’s Nikkei 225 benchmark index breached 37,000 intra-day for the first time in 34 years.11)
Kristina Hooper is Chief Global Market Strategist at Invesco. Andras Vig, Mike Sobolik, and Nicholas Buss contributed to this article.
Notes
1. Source: United States Banks Index, Datastream, Dec. 31, 2023.
2. Source: Bloomberg, L.P., as of Feb. 9, 2024.
3. Source: “Assets and liabilities of commercial banks in the United States,” Federal Reserve, Feb. 9, 2024.
4. Source: “Assets and liabilities of commercial banks in the United States,” Federal Reserve Bank of New York, as of Feb. 8, 2024.
5. Source: Kastle Back to Work Barometer, as of Feb. 25, 2024.
6. Source: CBRE-EA, as of Dec. 31, 2023.
7. Source: MSCI Real Assets, as of Sept. 26, 2023.
8. Source: Trepp CMBS Research, February 2024.
9. Source: “S&P 500 closes above key 5,000 level for first time,” CNN Business, Feb. 9, 2024
10. Source: Bloomberg, L.P., as of September 2017.
11. Source: “Japan’s Nikkei hits fresh 34-year highs; most Asian markets are closed for Lunar New Year holiday,” CNBC, Feb. 9, 2024.
Disclaimer
© 2024 by Invesco Canada. Reprinted with permission.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The opinions referenced above are those of the author as of Feb. 12, 2024. These comments should not be construed as recommendations, but as an illustration of broader themes. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations. Diversification does not guarantee a profit or eliminate the risk of loss. All investing involves risk, including the risk of loss.
Diversification does not guarantee a profit or eliminate the risk of loss.
All figures are in U.S. dollars.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
All investing involves risk, including the risk of loss.
Past performance is not a guarantee of future results.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
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