Outer Banks : Real Estate Banks Be in Peril Now

Outer Banks

Outer Banks : Real Estate Banks Be in Peril Now

  • If The Situation With Commercial Real Estate Doesn’t Improve, These Four Banks May Be in Peril

Outer Banks

Outer Banks
Outer Banks
  • Following a 70% decline in its share price, New York Community Bancorp (NYCB) experienced significant losses on its reserves for commercial real estate loans in January.
  • After doing some quick math, financial analysts at Evercore ISI discovered that a number of regional banks had a high exposure to commercial loans, which should worry investors.
  • Their analysis indicates that four banks could be at greater risk if the commercial sector keeps having trouble
    While loan defaults (or write-offs) have not returned to the levels seen during the financial crisis, ongoing losses in the commercial sector may compel at-risk banks to raise their cash reserves, according to John Pancari of Evercore, one of the analysts who examined the matter.
  • Having said that, Pancari does not necessarily think that these banks are in danger of failing should the number of commercial loan defaults rise.
  • Pancari told Barron’s, “This is not a liquidity or capital issue; this is an earnings issue for the banks.”
  • Outer Banks
Outer Banks
Outer Banks
  1. This is good news for the economy because investors and regulators would be alarmed by a second wave of regional bank closures similar to the one that destroyed First Republic Bank and several others in 2023.
  2. For shareholders in the at-risk banks, Evercore’s analysis is still unwelcome news.
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  7. In order to perform its analysis, Evercore compared the possible exposure that regional banks possessed to the total amount of their loan reserves—a “rainy day fund” that banks keep on hand to help offset losses in the event of significant loan defaults.
  8. Cullen/Frost Bank of Texas made the list because it has 1.45% loan reserves and 35% of its loans are for commercial real estate.
  9. The fact that Cullen/Frost’s average loan cash flow was 1.44 times debt expenses suggests that many of its loans are secured by properties that both produce income and pay off debt, which is a major factor working in their favor.
  10. The next company on the list is Synovus Financial, based in Georgia, with reserves of 1.09% and 32% of its loans concentrated in commercial real estate.

Outer Banks

Outer Banks
Outer Banks
  • The CEO of Synovus, however, stated that the bank has limited new commercial lending and has few troublesome loans.
  • With reserves of 2.2%, Rhode Island-based Citizens Financial Group has 19% of its loans exposed to commercial real estate.
  • Because office loans make up a sizable amount of the 19% loan exposure, Citizens Financial Group’s position is cause for concern. Additionally, it has a reserve of 10.2% for office loans.
  • This is significant since the office market is arguably the most problematic area of the commercial real estate industry.M&T Bank, located in Buffalo, New York, has 1.9% in reserves and 24% of its total loans in commercial real estate.
  • The reserves would cover 22% of M&T Bank’s losses if the bank were subjected to a stress test similar to the ones the Federal Reserve conducted on big banks like Wells Fargo following the 2008 financial crisis.
  • M&T reported that its loan-to-value property value ratio was 56% and that its outstanding commercial loan balance is at its lowest point in 15 years in a recent letter to shareholders.
  • M&T Chief Financial Officer Daryl Bible stated, “We feel really good where our reserve is right now,” during the company’s most recent earnings call.
  • I cannot guarantee that it won’t increase.
  • However, we believe that we have thoroughly examined our higher-risk category credits in the (commercial real estate) market.”
  • Pancari concludes that while a mass default is unlikely to harm depositors in the long run, it is still a good idea to keep a close eye on their watch-listed banks due to the possible impact on stock performance.
  • It’s understandable that all of the banks included in Evercore’s analysis would present a positive image, but past experiences have shown that all it takes is one bank failing due to subpar loans to start a domino effect that results in a regional banking crisis.

Outer Banks

Outer Banks
Outer Banks
  1. Nearly $1 trillion in commercial loan debt is due to mature in 2024, and many of the developers who owe the money are probably not going to be able to refinance at rates that will allow them to continue making money on their projects.
  2. That will undoubtedly result in defaults, and it is unlikely that some regional banks will survive the bad loans they have on their books.
  3. All things considered, investors should keep a close eye on this industry thanks to the Evercore analysis.
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