(This April 24 story has been corrected to clarify that the bank spokesperson referred to previous comments from CEO Joe Otting, in paragraph 12)
By Niket Nishant and Manya Saini
(Reuters) – Community Bancorp of New York (NYSE:) will need to attract buyers for its commercial real estate (CRE) loans at steep discounts and diversify its revenues as it races to shore up its finances.
The bank’s new management has promised to unveil a turnaround plan this month after losses on CRE lending, NYCB’s core business, sparked a rout that wiped nearly $6 billion from its market value and led to rating downgrades.
A $1 billion investment led by former US Treasury Secretary Steven Mnuchin’s Liberty Strategic Capital has shored up the bank for the near term, but the bank still needs to strengthen its capital and reduce its exposure to the CRE sector, which is being plagued by higher interest rates. prices.
NYCB’s future depends on new management forgiving some CRE loans and diversifying its balance sheet, according to half a dozen analysts and investors. But with rivals also pulling out of CRE and private equity and other institutional buyers looking for steep discounts, good deals will be hard to come by, they said.
“If you’re a hedge fund or an asset manager, you know NYCB has to sell. So you’re going to factor that into your pricing,” said Brian Graham, co-founder of financial services firm Klaros Group, adding it will be difficult for the bank to find loans it can sell at a premium.
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Multifamily apartments make up roughly 44% of NYCB’s loans, and about half of those are in buildings with control over how much landlords can raise rent, reducing their appeal.
Last month, the new management team, led by former Comptroller of the Currency Joseph Otting, said NYCB had sold a commercial cooperative loan at a profit and that non-bank bidders were interested in other loans, although it did not provide details.
But with interest rates expected to remain high for longer than previously expected amid persistent inflation, NYCB’s loan portfolios will likely need to be revised to reflect this, said Brian Mulberry, client portfolio manager at Zacks Investment Management, which owns several bank stocks persists.
“To generate any interest from buyers, larger discounts today are needed to offset higher refinancing costs in the future,” Mulberrry said, although he added that investors had priced in more potential bad news from the bank.
Shares of NYCB are down 70% since the beginning of the year, the lowest level since about 1996.
Depending on the size of the discount and how the loan is valued on the bank’s balance sheet, NYCB may have to incur a loss on some CRE loans.
A bank spokesman referred Reuters to comments Otting made last month indicating he will share his strategy and forecast first-quarter earnings. The bank cannot yet say when the bank will report from Tuesday.
Wall Street analysts expect NYCB to report a loss, compared with a profit a year earlier.
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“Investors will want a clearer picture of NYCB’s underlying credit quality and capital adequacy while determining its future earnings power,” said Michael Ashley Schulman, chief investment officer at multifamily firm Running Point Capital.
DIVERSIFICATION PUSH
The rate of non-performing CRE loans as a percentage of U.S. banks’ portfolios doubled to 0.81% at the end of 2023, up from 0.4% a year earlier, the International Monetary Fund said this month.
Ratings agency Moody’s (NYSE:) said NYCB’s CRE concentration, which was approximately six times its tangible common share capital as of December 31, 2023, is the highest among rated U.S. banks.
The involvement of private equity buyers is helpful in stabilizing capital, but long-term uncertainties surrounding governance and strategy remain, the rating agency said.
NYCB will have to withdraw from New York’s real estate business — the bedrock of its 165-year-old banking business for five decades — and diversify into other lending and reimbursement businesses.
While high interest rates have reduced demand for home loans in the short term, the bank’s Flagstar mortgage business could provide greater revenue diversity if rates eventually fall, said Fitch Ratings analyst Anthony Di Tomasso.
Investors will also look for evidence that the bank’s existing streams of non-interest income are offsetting the CRE losses, Mulberry said. That could be done by improving revenues elsewhere, such as from loan servicing fees or cost savings, although the bank will also have to invest in compliance after disclosing audit errors, analysts said.
Investors and analysts will focus on NYCB’s failed integration Signature bank (OTC:) assets it acquired last year, pushing its balance sheet above a regulatory threshold of $100 billion, leading to tighter capital and liquidity rules.
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That deal was intended to diversify the bank away from CRE, adding $33.5 billion in deposits and about $11.7 billion in commercial and industrial loans.
However, NYCB warned last month that the fair value of these assets could change, underscoring continued uncertainty about the state of the bank’s balance sheet.
“A turnaround at banks often takes years and not weeks,” says Schulman.
