- Wednesday, October 16, 2024
The recent decline of 44% in the stock of New York Community Bancorp Inc. has had a significant impact on other small banks, causing a ripple effect on both their shares and bonds.
Unexpected Loss and Reserve Buildup
New York Community Bancorp Inc. surprised the markets with its fourth-quarter earnings report, revealing an unexpected loss and a buildup of reserves. The bank also faced challenges in the office-space sector, particularly with two troubled loans.
Dividend Cut and Capital Building
To comply with regulatory requirements as a Category IV bank with assets ranging from $100 billion to $250 billion, the bank announced its decision to reduce its dividend by over two-thirds. This strategic move aims to build up capital.
Exposure to Commercial Real Estate
The news has raised concerns about the smaller banks' exposure to commercial real estate. Analysts speculate that these banks may need to increase loan-loss provisions to mitigate potential risks.
Impact on Bonds
The decline in New York Community Bancorp Inc.'s stock also had a significant impact on its single traded bond. According to data-solutions provider BondCliQ Media Services, the floating-rate notes, maturing in November 2028, experienced a drastic decrease of 12 cents this week, falling to 87.27 cents on the dollar.
Effect on Other Community Banks
This stock decline also weighed heavily on other community banks. For instance, Valley National Bancorp's 3% notes maturing in June 2031 experienced a similar fate, dropping to 79.34 cents on the dollar. Valley National Bancorp, known as Valley Bank, is a regional lender headquartered in Morristown, N.J., with approximately $61 billion in assets.
Small Community-Banks Bonds Hit Hard in Recent Selling
The Selling Effect on Western Alliance Bancorp and Zions Bancorp N.A.
Western Alliance Bancorp, a Phoenix-based lender with $70.9 billion in assets as of Dec. 31, saw its bonds impacted by the selling trend. Similarly, Zions Bancorp N.A., based in Salt Lake City and managing $87.2 billion in assets, also suffered from this market upheaval.
Examining the Maturity Bucket for These Bonds
Taking a closer look at the maturity bucket for these bonds helps shed light on their current situation. This chart provides valuable insights into the different maturity dates for these affected bonds.
Vulnerability of Regional Banks
According to Oppenheimer analyst Chris Kotowski, regional banks face greater exposure to commercial real estate. This vulnerability makes them particularly susceptible during downturns in the office-space market. Kotowski made these comments on Friday, emphasizing the challenges faced by regional banks in the current economic climate.
New York Community Bancorp's Real Estate Ties
New York Community Bancorp, after acquiring Signature Bank last year, has approximately 73% of its loan portfolio tied to real estate. This high level of exposure is a result of the acquisition and highlights the potential risks faced by the bank. Additionally, its loan portfolio in the New York area includes investments in multifamily homes subject to rent regulations, reflecting the realities of the local market.
Evaluating the Business Model of Small Regional Narrow Banks
Chris Kotowski further expressed his concerns about the business model of small regional narrow banks. According to him, these banks are inherently undiversified and flawed. The recent events serve as a stark example of the vulnerabilities associated with this particular business model.
Impact on Bank Exchange-Traded Funds
The selling of small community-bank bonds has also had a significant impact on bank exchange-traded funds. The SPDR S&P Regional Banking ETF (KRE) has experienced a sharp decline of 7.4% for the week. Additionally, the KBW Nasdaq Bank Index (BKX) has fallen by 2.4% in light of these market conditions.
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