New York Community Bancorp, a prominent lender in the United States, has faced its third credit-rating cut due to concerns over its exposure to the commercial real estate (CRE) market. Morningstar DBRS downgraded NYCB’s credit rating, citing the bank’s “outsized” exposure to CRE. This comes after rating agencies Fitch and Moody’s had already lowered their ratings for the bank.
The news of the credit-rating cut has taken a toll on NYCB’s shares, which have fallen by around 60% since last week. The bank posted a surprise fourth-quarter loss and reduced its dividend in response to regulatory challenges. Morningstar DBRS expressed concerns about the potential decline in NYCB’s stock price and its impact on customer and depositor confidence.
To address these challenges, NYCB’s management is taking steps to bolster investor confidence. The bank’s newly appointed executive chairman, Alessandro DiNello, announced that they would consider selling loans in their CRE portfolio or allowing them to naturally run off the balance sheet. Additionally, if necessary, NYCB would shrink its balance sheet by selling non-core assets to strengthen its financial position.
Some analysts have found encouragement in the bank’s recent messaging. Bernard von-Gizycki of Deutsche Bank stated that the announcements on strategic priorities and progress have provided transparency and are a step in the right direction. However, others see potential risks in the sector. Analysts have been warning for months that borrowers tied to CRE are at risk of defaulting on loans due to high interest rates and low occupancies.
Steve Lynch, vice president and analyst with Moody’s Investors Service, highlighted that negative events at one bank can impact confidence sensitivity in the sector and spread to other banks with similar risks. The week-long sell-off in NYCB shares has also affected banks in the U.S. and abroad, raising concerns about global contagion from CRE exposure.
Deutsche Pfandbriefbank (PBB) in Germany, which has 15% of its total loans tied to the CRE sector, referred to the situation as “the greatest real estate crisis since the financial crisis.” While the lender believes it has enough funds to cope with a downturn in the real estate segment, its shares and bonds have fallen. In Asia, Japan’s Aozora Bank saw its shares recover slightly after reaching a three-year low last week, as 6.6% of its loan portfolio is exposed to office real estate in the United States.
Despite these concerns in the banking sector, there is little evidence that they are denting confidence in the broader stock market in the U.S. The S&P 500 remained unchanged on Thursday after reaching a fresh record high the previous day. U.S. Treasury Secretary Janet Yellen acknowledged the potential stress on banks and financial losses from weakness in the commercial real estate market but assured that regulators are working with banks to address these risks.
Experts believe that last year’s banking woes have demonstrated that regulators and central banks have the necessary tools to prevent a systemic crisis and would act swiftly if conditions worsen. Mohit Kumar, chief economist for Jefferies in Europe, stated that while concerns may emerge over individual banks, there is no systemic crisis on the horizon.
In conclusion, New York Community Bancorp’s credit-rating cut due to its exposure to the commercial real estate market has raised concerns about the broader banking sector. The bank’s management is taking steps to restore investor confidence, but analysts warn of potential risks in the sector. While banking worries have not affected the broader stock market in the U.S., lenders in Europe and Asia are also feeling the impact of the CRE exposure. However, experts believe that regulators and central banks have the necessary tools to prevent a systemic crisis and would intervene if conditions worsen.