The Zhitong Finance App learned that the credit rating of New York Community Bank (NYCB.US), which took over “Signature Bank” (Signature Bank) during the US regional banking crisis last Friday, was downgraded to junk grade by Fitch Ratings (Fitch Ratings), and Moody's Investors Service (Moody's Investors Service), another international rating agency that downgraded New York Community Bank's credit rating to “junk grade” last month. Just a day before two major international rating agencies downgraded the bank's rating, the small to medium bank, which focuses on commercial real estate, said it had discovered a “major flaw” in the way and path it tracks loan risk.
According to a statement released by Fitch on Friday, Fitch downgraded the bank (New York Community Bank)'s long-term issuer credit default rating from “BBB-” to “BB+,” that is, a “junk grade” one level lower than the investment grade. Moody's, which downgraded the bank's rating to “junk” last month, further downgraded the New York Community Bank issuer's credit rating from the junk rating, from the previous “Ba2” to “B3.”
Fitch, an international rating agency, said the discovery of the bank's key weaknesses “prompted people to reconsider New York Community Bank's actual control over the provision adequacy ratio, particularly its high risk exposure to commercial real estate.”
Fitch said that the credit rating downgrade decision was based on a reassessment of New York Community Bank's risk situation. This was made after New York Community Bank announced major flaws in the company's internal controls, particularly with regard to internal loan reviews. The agency added that its rating outlook for the bank was “negative.”
Additionally, rating agencies, including Morningstar DBRS (Morningstar DBRS), have downgraded the struggling New York Community Bank, mainly due to its “excessive” exposure to commercial real estate (CRE). In an environment of high interest rates, bad debts in the US banking sector and high risks in the commercial real estate industry can be described as facts that investors can see.
Since this year, New York Community Bank (NYCB.US) has continued to “thunder”
Since entering 2024, the New York Community Bank, which took over “Signature Bank” (Signature Bank) during the US regional banking crisis last year, can be described as a continuous thunderstorm.
At the end of January, New York Community Bank's decision to cut dividends and reserve reserves caused its stock price to plummet by a record nearly 38%, and dragged down the KBW Regional Banking Index (KBW Regional Banking Index) on Wednesday to record its worst trading day since Silicon Valley Bank (Silicon Valley Bank) went bankrupt at the speed of light in March last year.
Judging from financial data, the biggest reason for New York Community Bank's quarterly losses was that the bank's loan loss provision for the quarter reached 552 million US dollars, ten times higher than analysts' expectations, and far exceeded the previous quarter's 62 million US dollars, which suggests that the credit outlook for commercial real estate has deteriorated.
This concern reflects the continuing downward trend in US commercial real estate values under the pressure of high interest rates, and the difficulty of predicting which specific loans may collapse. The reason behind this situation may be that the COVID-19 pandemic has caused people to habitually switch to remote work, and interest rates quickly rose to their highest level in 22 years after the start of the Federal Reserve's interest rate hike cycle, making refinancing more expensive for struggling borrowers. Billionaire investor Barry Sternlicht has warned that the US office market could face losses of more than $1 trillion.
Community Bank of New York announced on Thursday that it needs to step up the scrutiny of loan approvals. This has once again raised investors' concerns that the bank may have severe commercial credit exposure to struggling commercial real estate owners, including apartment landlords in the New York area. The company's stock price plummeted 26% last Friday, although the company said it doesn't expect control flaws to cause changes in its credit loss provisions.
On Thursday, the company released the latest documents showing that due to the discovery of some major problems with the loan review process, the goodwill value of US$2.4 billion was written down. The net loss for the fourth quarter was revised from the previous US$260 million to US$2.71 billion, and market concerns about the health of small and medium-sized banks in the US have resurfaced.
The bank stated in a document: “The bank's management discovered significant flaws in internal controls relating to internal loan reviews, mainly due to ineffective supervision, risk assessment and monitoring activities.” Meanwhile, later in the day, the bank announced that it had appointed new leadership to deal with the current difficult situation.
Rating agency Moody's said in a statement: “Moody's believes New York Community Bank may have to further increase its credit loss provisions in the next two years due to the credit risk associated with its commercial loans.” The agency also stated, “There is a huge risk of repricing the loan size under its multi-household benchmark.”
New York Community Bank's stock price closed at $3.55 last week, and the cumulative decline in stock prices since this year has reached 65%.
“The company has strong liquidity and a solid deposit base,” Alessandro DiNello (Alessandro DiNello), the newly appointed CEO last week, said in a statement earlier last Friday. “I am confident that we will resolutely implement our transformation plan to create more value for our shareholders.”
The commercial real estate dilemma may continue until 2025, and the difficult times for New York Community Bank are not over
Financial market concerns about the health of small and medium-sized banks in the US can be described as being rekindled in 2024. The number of US commercial real estate auctions in January was 635, an increase of 17% on a quarterly basis; a large number of US commercial real estate auctions caused US regional banks (that is, small and medium-sized banks in the US) that are highly linked to office buildings to face tremendous liquidity pressure, which may even affect the entire US financial industry.
According to Trepp's statistics, by the end of 2025, the US banking sector will face up to 560 billion US dollars of commercial real estate debt maturing, accounting for more than half of the total real estate debt due during the same period. In particular, small to medium regional banks, such as Community Bank of New York, which are highly exposed to commercial real estate, are likely to be more negatively impacted than larger commercial banks because they lack large credit card portfolios or investment operations to protect themselves from the impact.
Although problems in the US commercial real estate market (especially office buildings) have been very obvious in the nearly four years since the outbreak of COVID-19, the commercial real estate market has remained unstable to a certain extent: as buyers and sellers are uncertain about the value of buildings, the number of large-scale transactions has been drastically reduced. Now, due to the need to resolve the debt problem that is about to expire, and the prospect that the Federal Reserve may cut interest rates, it is expected to trigger more transactions, making it clear how much the value has actually fallen.
David Aviram (David Aviram), head of Maverick Real Estate Partners, said: “Compared to signature banks, New York Commercial Bank is a much more conservative bank.” “However, since loans secured by multi-family housing properties with stable rents account for a larger proportion of New York Community Bank CRE books compared to peers, changes in the 2019 rent law are likely to have a greater impact.”
Avilam also said: “The percentage of delinquent loans reported by banks so far is only a drop in the ocean compared to the default that will occur in 2024 and 2025.” “Banks are still facing these major risks, and the expected fall in interest rates next year will also make it difficult to resolve the commercial real estate problems faced by banks.”