KBE: CRE Worries Coming Home To Roost

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Lagged effects of higher interest rates are still filtering through the economy, potentially impacting bank earnings.For example, New York Community Bancorp recently reported dismal Q4 results due to ...

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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nKBE: CRE Worries Coming Home To Roost\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-02-02 20:26 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4667047-kbe-cre-worries-coming-home-to-roost><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Lagged effects of higher interest rates are still filtering through the economy, potentially impacting bank earnings.For example, New York Community Bancorp recently reported dismal Q4 results due to ...</p>\n\n<a href=\"https://seekingalpha.com/article/4667047-kbe-cre-worries-coming-home-to-roost\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4118","symbol_name":"综合性资本市场","start_time":0,"source_url":"https://seekingalpha.com/article/4667047-kbe-cre-worries-coming-home-to-roost","article_id":"2408607774","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1489195906/image_1489195906.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2408607774","pubTimestamp":1706876795,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Lagged effects of higher interest rates are still filtering through the economy, potentially impacting bank earnings.For example, New York Community Bancorp recently reported dismal Q4 results due to ","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4118":"综合性资本市场","NYCB":"纽约社区银行","BK4195":"互助储蓄与抵押信贷金融服务","HBCP":"Home合众银行","DB":"德意志银行","BK4585":"ETF&股票定投概念","BK4588":"碎股","BK4552":"Archegos爆仓风波概念","KBE":"银行指数ETF-SPDR KBW","BK4550":"红杉资本持仓","BK4566":"资本集团","BK4211":"区域性银行","FDN":"First Trust Dow Jones Internet I"},"translate_title":"KBE：CRE担心回家得到报应","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"NYCB":1,"KBE":1,"DB":1,"HBCP":1,"FDN":0.89,"US5Y.BOND":0.8,"US3Y.BOND":0.8,"US30Y.BOND":0.8,"US2Y.BOND":0.8,"US12M.BOND":0.8,"US10Y.BOND":0.8,"US6M.BOND":0.8,"US7Y.BOND":0.8,"US912797GN18.BOND":0.6,"US912797GM35.BOND":0.6,"US912797GL51.BOND":0.6,"US912797GK78.BOND":0.6,"US912797HH31.BOND":0.6,"US912797GE19.BOND":0.6,"US912797GP65.BOND":0.6,"US912797GQ49.BOND":0.6,"US912797GW17.BOND":0.6,"US912797GX99.BOND":0.6,"US912797HE00.BOND":0.6,"US912797HG57.BOND":0.6,"US912797GB79.BOND":0.6,"US912797FS14.BOND":0.6,"US912797FH58.BOND":0.6,"US912796ZY88.BOND":0.6,"US912796Z285.BOND":0.6,"US912796CX52.BOND":0.6},"content_text":"Lagged effects of higher interest rates are still filtering through the economy, potentially impacting bank earnings.For example, New York Community Bancorp recently reported dismal Q4 results due to provisions for CRE and multi-family loans.With a looming $1.2 trillion wall of mortgage maturities in the next 2 years, I believe regional bank earnings will still face headwinds.Rixipix/iStock via Getty Images Back in August, I penned a cautious follow-up article on the SPDR S&P Bank ETF (NYSEARCA:KBE), as rising interest rates were continuing to put pressure on banks' balance sheets. For a while, my thesis was correct as long-term interest rates climbed higher and the KBE ETF corrected to a low of ~$34 in late October (Figure 1). Figure 1 - KBE has experienced a sharp rebound since late October (Seeking Alpha) However, as the Fed held policy rates steady and began to pivot away from its 'higher for longer' monetary policy stance, long-term interest rates moderated, with the 10-year treasury yield declining from nearly 5.0% to a recent low of 3.8% (Figure 2). Figure 2 - 10-year yield has moderated (St. Louis Fed) This provided a relief bounce to regional bank equities, as the pressures on their balance sheets from unrealized security losses seemingly eased. The KBE ETF staged a furious rally from ~$34 to a recent high of $47, or nearly 40%, erasing all of the March regional banking crisis-induced declines (Figure 3). Figure 3 - KBE has erased March 2023 declines (Author created with price chart from StockCharts.com) With the Fed recently announcing the ending of the Bank Term Finance Program (\"BTFP\"), everything appears to be back to normal for regional banks. Or is it? Canaries In The Coal Mine The main reason I remain cautious on regional banks is because the lagged effects of higher interest rates are still flowing through the economy, so it may be premature for investors to declare victory. For example, recently, New York Community Bancorp (NYCB) reported dismal fiscal fourth quarter results, with adjusted EPS of -$0.27 vs. $0.29 consensus estimates and $0.30 in the prior year. NYCB also had to cut its quarterly dividend from $0.17 to $0.05 to conserve capital. The negative earnings surprise and dividend cut hammered NYCB's stock, with the stock declining by over 45% and erasing all the gains since the March regional banking crisis (Figure 4). Figure 4 - NYCB plunged on weak earnings (Seeking Alpha) If readers can recall, NYCB was one of the 'winners' of the regional banking crisis last March when it was able to acquire most of the assets of the failed Signature Bank (\"SBNY\"). Analysts clamoured to upgrade the bank after its sweetheart deal to purchase $38.4 billion of Signature Bank assets, including loans of $12.9 billion, at a $2.7 billion discount. Unfortunately, the shine is beginning to wear off as the Signature Bank transaction boosted NYCB's total assets over $100 billion, prompting enhanced capital standards and risk management practices. NYCB Record Large Loss Provisions The biggest negative surprise in NYCB's fourth quarter was an increase in provisions for credit losses (\"PCL\"), from $62 million in Q4/22 to $552 million in Q4/23 (Figure 5) in order to bring NYCB's PCL ratio more in line with peers. Figure 5 - NYCB surprised with large PCL (NYCB investor presentation) This figure was far above what analysts were expecting and reflected efforts to improve provisioning for expected weakness in NYCB's commercial real estate (\"CRE\") and multi-family portfolios, which represent 12.4% and 44.0% of NYCB's loan book (Figure 6). Figure 6 - NYCB loan book allocation (NYCB investor presentation) Multi-Family Provisions May Be Idiosyncratic For NYCB, the issue in its multi-family portfolio may be idiosyncratic to the company as it is heavily exposed to rent-controlled apartments in New York, which have been seeing elevated non-performing loans as borrowers are squeezed between rising mortgage rates and capped rent increases (Figure 7). Figure 7 - NYCB's rent-controlled loans seeing elevated non-performing ratios (NYCB investor presentation) NYCB had to charge off $117 million in its multi-family portfolio in 2023 compared to virtually no losses in the prior years (Figure 8). Figure 8 - Leading to large charge-offs and PCLs in multi-family (NYCB investor presentation) But CRE Weakness Is Industry-Wide However, NYCB's issue with commercial real estate may be endemic to the whole industry, as CRE loans represent a large part of most regional bank's loan portfolio. Non-performing loans in NYCB's CRE portfolio were $83.9 million in Q4, and the bank had to charge off $41.5 million in loans in the quarter (Figure 9). Figure 9 - NYCB had to charge off $42 in CRE loans (NYCB investor presentation) The problem with commercial real estate is well known and has to do with the drastic reductions in CRE values due to a combination of higher interest rates and lower occupancy, as workers continue to prefer working from home. For example, according to Moody's Analytics, office vacancies in the U.S. reached a record high of 19.6% at the end of 2023, surpassing prior peaks in 1991 and 1986 (Figure 10). Almost on a weekly basis, we see news of landlords defaulting or renegotiating mortgages on their office real estate. Figure 10 - U.S. office vacancy at all-time highs (Moody's) While lenders and borrowers can pretend everything is fine when they do not have to refinance their mortgages, we are increasingly seeing office buildings transact at fractions of their last sales price and forcing lenders to take large losses really. Even prominent office buildings are not immune. For example, the Rosslyn/Xerox Building in Washington D.C. was recently sold for just $25 million, or 17% of the last transaction price of $145 million in 2011. While investors (TIAA owned the building) no doubt bore the brunt of the $100 million+ in losses, lenders are unlikely to be immune when haircuts are this steep. NYCB May Be Just The Tip Of The Iceberg Furthermore, NYCB may just be the tip of the iceberg, as an estimated $1.2 trillion in CRE mortgages will need to be refinanced before the end of 2025. Figure 11 - CRE maturity wall (IMF via. Financial Times) A day after NYCB shocked investors with its negative earnings surprise, Japanese bank Aozora also announced a surprise loss due to increased loan-loss provisions tied to its U.S. commercial property portfolio. Similarly, Deutsche Bank (DB) saw its highest provision for credit losses since Q2/2020, as the bank provisioned for losses in U.S. CRE. Fortunately for DB, its loan portfolio in the U.S. is miniscule and overall earnings were not materially impacted. In my opinion, what is likely to happen over the coming months is banks will report negative earnings 'surprises' as they increase provisions against CRE. The more banks increase provisions, the more pressure there will be on their peers to do the same, lest they should have to explain why their portfolios are immune. This creates a domino effect, causing one-day selloffs in the offending bank shares. Unfortunately for outsiders, the amount and severity of these provisions are hard to estimate ahead of time, so earnings season could become a landmine for bank investors. Risks To Being Overly Cautious Of course, my view on the KBE ETF may be overly cautious, as we saw bank shares rebound sharply in the last few months of 2023 when long-term interest rates moderated. On earnings, most banks are trading at attractive valuations at 11x Fwd P/E (Figure 12). Figure 12 - Regional bank valuations are not expensive (TIKR.com) With the economy still growing robustly, banks will likely be able to use earnings from higher net interest margins (\"NIMs\") to offset provisions and charge-offs in CRE and other loan portfolios. As long as the economy does not enter a recession, the impact of higher interest rates is an earnings issue and not a solvency issue. Conclusion I remain cautious on regional banks and the KBE ETF, as the impact of higher interest rates is still filtering through the economy. While the acute balance sheet stress on investment securities has abated as long-term interest rates have moderated, problems with real estate loans made when interest rates were low are starting to emerge.  For example, NYCB recently surprised investors with large provisions for CRE and multi-family loans as fundamentals continue to be challenging. I am maintaining my hold rating at this time.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2408607774"}