New York Community Bancorp led increase in loan-loss reserves by big regional banks as lenders brace for potential downturn

By Steve Gelsi

NY Community Bancorp hiked loan-loss provision by 790% to $552 million in Q4 as the most of any regional bank

New York Community Bancorp boosted its lost-loss reserves by 790% or $490 million in the fourth quarter from the previous quarter, more than any other bank in its class, as it faces potential challenges in its office and multi-family loan portfolio.

While the reserve boost disclosed as part of its fourth-quarter update last week isn't considered a major factor for the stock's slide, it's part of a move by most large regional banks to be prepared for a potential downturn, at a time when office-space exposure remains an uncertainty for lenders. (See chart below of bank reserve levels).

To be sure, much of the boost in New York Community Bancorp's reserves could be attributed to the bank's efforts to build up its balance sheet to meet the regulatory requirements of a Category IV bank of more than $100 billion in assets.

Other banks with large percentage increases in their loan-loss reserves in the fourth quarter from the previous quarter include PNC Financial Services Group Inc. (PNC) with an 80% increase, Valley National Bancorp (VLY) with a 133% increase and Popular Inc. (BPOP) with a 76% hike.

Some banks saw their loan loss reserves drop including 54% declines each by Fifth Third Bancorp (FITB) and First Horizon Corp. (FHN)

In terms of commercial real estate and multi-family, Valley National has the largest exposure with 46% of its total assets in that bucket, followed by 43% for New York Community Bancorp, 30% for Synovus Financial Corp. (SNV) and 26% for Webster Financial Corp. (WBS).

Doug Peta, of BCA Research Inc. said in a research note this week that New York Community Bancorp appears to be an isolated case of bad management calls.

Broadly speaking, mid- and small-cap banks have a freer hand than larger-cap banks as measured by their higher loan-to-deposit ratio of more than 0.8 compared to about 0.6 for bigger banks, Peta said.

That gives banks more leeway to address any bad loans.

"Sharp declines in the values of some office buildings will imperil several lenders," Peta said. "In our view, however, the fallout will not have a material impact on credit creation or economic activity."

Matthew Cypher, director of the Steers Center for Global Real Estate at Georgetown University's McDonough School of Business, said the office sector has been a burden on banks, but he doesn't expect a cataclysmic effect on the sector.

"Banks have made real-estate loans that they'll have to take their lumps on," he said.

Cypher warned that the commercial real estate market is not all about office space, with other subsectors such as data centers and healthcare facilities faring relatively well.

It also depends on a particular office-space market. Advances in artificial intelligence are boosting hiring and office space needs in the tech sector, but other areas such as Washington remain weak.

Still, the landlords and banks have been holding their breath for a few quarters, but some of the lower office space prices are starting to be reflected in mortgages.

The rapid rise in interest rates has also taken a toll on portfolios by making debt more expensive for potential refinancings, at a time when office space pricing has yet to find a bottom in many markets, Cypher said.

"We drank a lot of cheap debt for a long time and the reckoning is painful," Cypher said.

In a flurry of developments around New York Community Bancorp (NYCB), Bloomberg reported that it's in the market to finance its residential mortgages, including third-party capital for its Flagstar Bank business.

Also read: New York Community Bancorp looks to sell rent-regulated commercial real estate after surprise quarterly loss

A bank's provision for credit losses is the amount of money it adds to its loan-loss reserves in a move that directly takes money away from pretax earnings.

Loan-loss reserves are also known as allowance for credit losses, or ACL, an asset that declines as problem loans are charged off.

Even with its big dollar boost to its loan loss reserves, New York Community Bancorp's reserve coverage looks light, which means it may have to raise more capital at a time when the stock is weak and its credit has been downgraded.

BCA Research's Peta said New York Community Bancorp benefitted for years as a lender to rent-regulated apartment building owners because of the low credit risk and lack of competition in the sector.

The situation changed in 2019 under a new law that kept landlords from converting rent-controlled units into market-rate units, which are worth more money.

"A mortgage lender that could previously count on steady collateral appreciation suddenly faced the potential that building valuescould fall as landlords had less incentive to maintain their buildings," said Peta.

The listed stocks on the chart above include the largest 20 banks by total assets in the KBW Nasdaq Bank Index BKX or the KBW Nasdaq Regional Banking Index XX:KRX, excluding the big six (JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Citigroup Inc. (C), Wells Fargo & Co. (WFC), Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS)) and also excluding three large banks primarily focused on providing trust, asset-management and securities-custody services: Bank of New York Mellon Corp. (BK), State Street Corp. (STT) of Boston and Northern Trust Corp. (NTRS) of Chicago.

Also read: Does New York Community Bancorp have another surprise in store for investors?

Check out On Watch by MarketWatch, a weekly podcast about the financial news we're all watching - and how that's affecting the economy and your wallet. MarketWatch's Jeremy Owens trains his eye on what's driving markets and offers insights that will help you make more informed money decisions. Subscribe on Spotify and Apple.

-Steve Gelsi

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

02-07-24 1456ET

Copyright (c) 2024 Dow Jones & Company, Inc.