New York Community Bank Plunges, Will Medium-Sized Banks in the US Be Affected?

According to Zhitong App, the stock price of New York Community Bancorp, which took over "Signature Bank" during the banking crisis in the United States last year, plummeted nearly 38% last Wednesday and fell more than 11% on Thursday. The reason for the sharp drop in the stock price of New York Community Bancorp is that the bank's credit loss provision in the fourth quarter of 2023 reached a staggering $552 million, far exceeding the market consensus expectation of $45 million and the $62 million in the previous quarter, indicating a deterioration in credit prospects.

As of December 31, 2023, the credit loss provision of New York Community Bancorp accounted for 1.17% of total loans, higher than the 0.74% on September 30, 2023. Another indicator of credit quality, the net charge-off ratio to total loans, increased from 0.03% in the third quarter of 2023 to 0.22% in the fourth quarter.

The high credit loss provision of New York Community Bancorp is to cope with the weak office building industry and the potential repricing risk of multiple family investment portfolios. In addition, the bank's acquisitions for growth have triggered stricter capital requirements. After taking over the "Signature Bank" that collapsed last year, the bank's assets have exceeded the $100 billion mark, so according to regulatory requirements, more capital and loss provisions need to be reserved.

In addition, the latest quarterly financial report released by New York Community Bancorp last week showed an unexpected loss of $260 million, while the market had previously expected a net profit of $206 million. The bank also announced a reduction in dividends to 5 cents, far below the market's previous expectation of maintaining dividends at 17 cents.

What does the fourth-quarter performance of New York Community Bancorp mean for mid-sized banks in the United States? Morgan Stanley analyst Manan Gosalia expects that the bank's expectations for provisions for almost all banks it covers are too low, as commercial real estate (CRE) is expected to deteriorate from now on and remain volatile in the coming quarters. The analyst predicts that these banks' net charge-offs for CRE will not return to more normal levels until 2026.

The analyst expects that the reserve levels of other banks will increase, but not by a large margin. The analyst said, "We have always noticed a risk that banks with high exposure to CRE tend to have lower reserve levels. Over time, they may have to increase their reserve levels."

The analyst said, "We still see this as a risk, especially after New York Community Bancorp significantly increased its reserve levels last quarter. However, we have not seen banks that increase their reserve levels on a large scale or quickly like New York Community Bancorp, as other banks with lower reserve levels are smaller in scale and far from the $100 billion threshold for the fourth category of bank assets." Banks with assets close to or exceeding $100 billion will have to increase spending to meet new risk management/infrastructure investments. Specifically, Morgan Stanley expects higher spending in 2024 for M&T Bank (MTB.US), Fifth Third Bank (FITB.US), and Citizens Financial Group (CFG.US) compared to market consensus.

Analysts predict that with credit deterioration and uncertain macro outlook, bank stock buybacks are expected to remain unchanged or at lower levels to preserve capital. However, analysts do not see a risk of dividend cuts for other banks they are focused on (like New York Community Bancorp).

Analysts also point out that banks intending to make acquisitions may bolster their capital, as the Office of the Comptroller of the Currency will apply the latest principles in reviewing bank merger applications, emphasizing the importance of the acquirer's capital position, risk management, overall performance, and regulatory concerns.

Taking all factors into consideration, analysts maintain a consistent rating on the mid-sized bank sector and recommend maintaining defensive positions throughout the sector. Analysts prefer banks with strong deposit franchises, capital, and excess liquidity, particularly M&T Bank, East West Bancorp (EWBC.US), Webster Financial (WBS.US), and Huntington Bancshares (HBAN.US). Despite higher commercial real estate (CRE) exposure for M&T Bank, East West Bancorp, and Webster Financial, these banks also maintain higher capital adequacy ratios to cushion potential credit losses. Additionally, these banks have attractive valuations.

For investors inclined to reduce CRE risk in bank investments, large banks are an option to consider. Last week, Morgan Stanley analyst Betsy Graseck upgraded the rating of the large bank sector to "attractive" as she expects upcoming regulatory reforms to raise capital levels to be less stringent than current proposals, and upgraded the ratings of Goldman Sachs (GS.US), Citigroup (C.US), and Bank of America (BAC.US) to "buy".