Regional banks may saddle themselves with $63B in fresh debt to meet regulatory requirements: report

By Steve Gelsi

Banks may turn to corporate bond market to raise capital, while commercial real estate credit risk poses an additional worry.

Eighteen regional banks may add about $63 billion of holding company debt to meet proposed regulatory guidelines for lending institutions of $100 billion to $250 billion of assets, in the latest challenge to the sector, according to a Bloomberg report.

It's yet another cloud over regional banks, along with potential credit risk in commercial real estate and economic uncertainty heading into late 2023.

The fresh capital would be needed for banks such as First Citizens (FCNCA), Truist Financial Corp. (TFC), PNC Financial Services Group Inc (PNC), Citizens Financial Group Inc. (CFG) and M&T Bank (MTB), the Bloomberg report said.

These and other companies are expected to consider fresh corporate bond offerings.

While the capital raise would be significant to comply with long-term capital requirements and other measures proposed by the Federal Reserve and the Federal Deposit Insurance Co., there's no guarantee the dollars will be enough to prevent bank failures in the future, according to a research note published Wednesday by Bloomberg Intelligence analysts.

Also read:Analyst sees FDIC rules on long-term debt 'on the tamer side of expectations'

In a positive development, banks will not be required to meet total loss-absorbing capital level comparable to larger banks, as some forecasts had suggested, the Bloomberg report said.

Along with the regulatory front, regional banks appear vulnerable to weakness in the office real estate market after loading up on loans in the sector in the past decade or so.

A report this week by The Wall Street Journal said banks about doubled their loan activity to landlords to a total of $2.2 trillion by 2022 from 2015, with small- and medium-sized institutions originating many of them.

For banks, the total exposure to commercial real estate is about $3.6 trillion, which includes indirect lending transactions by lending to financial companies that in turn lend to landlords, bond purchases backed by commercial properties, foreclosed properties, trading portfolios and other assets, according to the WSJ. The exposure amounts to 20% of bank deposits, the report said.

Prices for commercial real estate, particularly downtown office properties, are expected to drop, which is a troubling sign for lenders.

Also read: Bank asset quality, weaker profits spark Moody's reviews and downgrades as it weighs potential 2024 recession

Bank stock have continued to underperform the overall equities market.

The KBW Nasdaq Bank Index BKX is down 20.8% in 2023, compared to a 31.8% rise by the Nasdaq COMP and a 16.2% increase by the S&P 500 SPX. The Financial Select SPDR ETF XLF is up by 0.3% year-to-date, while the S&P SPDR Regional Banking ETF KRE is down by 26.6% and the SPDR S&P Bank ETF KBE is down by 15.8%.

Also read: FDIC says inflation, interest rates and geopolitical uncertainty are among 'matters of continued supervisory attention'

-Steve Gelsi

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09-08-23 1225ET

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