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US regional banks are not out of the woods yet. Having ridden out a deposit flight that led to the collapse of Silicon Valley Bank and First Republic last year, the challenge for many will be finding a way to increase profits again in 2024.
Chief among the obstacles are funding costs and exposure to the troubled commercial real estate sector. The 44 per cent collapse in New York Community Bancorp’s share price this week is a reminder of how tough navigating these two roadblocks will be.
The New York-based lender this week set off a fresh wave of selling in regional banking stocks after it swung to a surprise fourth-quarter loss, slashed its dividend and set aside hundreds of millions of dollars in provisions for potential bad loans in its CRE portfolio.
At first glance, NYCB’s woes appear unique to its balance sheet. Executives said the acquisition of Signature Bank, one of the regional banks that collapsed last year, pushed NYCB’s assets above a $100bn regulatory threshold. That requires it to hold more capital and liquidity. NYCB’s decision to cut its quarterly dividend by 70 per cent helps meet these regulatory requirements.
But that is only part of the story. High funding costs is the other.
NYCB paid an average rate of 3.62 per cent on its interest-bearing deposits in the fourth quarter, up from 1.93 per cent a year ago. That compares with the 2.78 per cent its far larger peer JPMorgan paid that period. At the same time, NYCB’s loan growth has stalled, with the average loan balance down quarter on quarter.
That is squeezing profitability. Its net interest margin fell 45 basis points to 2.82 per cent quarter on quarter. That is expected to fall further in 2024. Net interest income could fall by as much as $300mn this year.
Then there is the commercial real estate dilemma. Most banks want to reduce their exposure to this $5.8tn market. A record amount of loans are maturing and need refinancing this year and next. Yet they need interest from the high-yield loans to finance the generous deposit rates required to attract savers.
Among regional banks, Bank OZK and Valley National Bancorp stand out, with high exposure to CRE loans but low CRE reserve ratios, according to Morgan Stanley research. At OZK, CRE loans make up some 63 per cent of the bank’s earning assets.
Repercussions from last year’s regional bank crisis continue to roil the sector. More CRE writedowns will mean smaller regional banks have more firefighting to do.
This article has been amended to reflect how much net interest income could fall by this year
