NYCB Was Uniquely Risky; We Would Not Read Too Much Into the Entire Banking Sector

Amid the fallout of Silicon Valley Bank’s failure, our thesis was that all the U.S. banks we cover could weather the storm except First Republic FRCB (which we downgraded to a $3 fair value estimate on March 20, 2023, then a $0 fair value on April 27, 2023). We believed the banks in trouble were in uniquely risky positions. We think this thesis has largely held up, and sorting through banks based on their unique risk profiles remains necessary and valuable.

To the extent that the market is selling off banks because of what happened to New York Community Bancorp NYCB, we think there could be opportunities once again, though we acknowledge the significant time horizon risk (it’s not clear how long it would take for the banks to prove to the market they are fine) and the possible choppy waters in the meantime (we expect more loan losses related to commercial real estate).

Risks in commercial real estate, or CRE, have been lurking for some time. Our thesis here has been that there will be losses, it will take years to sort through them, and there will likely be some bank failures. However, we again predict our coverage would be able to weather the storm. The latest developments with NYCB have not caused us to change that thesis.

While we do not cover NYCB, we have been following the situation. The bank was in a uniquely risky position. It had materially higher CRE exposure relative to capital than any bank under our coverage—roughly double or more. NYCB was also subject to increasing regulatory scrutiny because it had recently surpassed $100 billion in assets following its acquisition of Signature Bank. No bank under our coverage is set to see its regulatory requirements change in such a way. NYCB has also had a more severe deterioration in core profitability. While many banks under our coverage have also seen pressure on profits, NYCB is seeing much more than most of them.

Surveying the banks under our coverage, Zions ZION, M&T MTB, Comerica CMA, and Cullen/Frost CFR have the most CRE exposure. Citizens CFG, M&T, and Zions have the largest relative office exposures under our coverage—although, once again, theirs are all smaller than NYCB’s. As we run loss scenarios and look at current reserves, particularly for office loans, we expect additional losses on CRE loans and increases in reserves over the next 12-24 months. However, even under our most bearish scenario—where we project multi-family losses worse than the financial crisis after 2007 and 30% of office property loans defaulting, with losses on those loans of 50%—we still see all the banks under our coverage making it without breaching any regulatory capital requirements.

If we apply this same scenario to NYCB, it would make the bank unprofitable and erode its capital. Depending on how fast these losses are realized and how the bank’s profitability profile develops, it could force the bank below regulatory minimums. NYCB’s risks strike us as specific to that bank, due to its level of exposure and the regulatory timing catalyst.