Outlook on 5 Regional Banks Lowered by S&P on CRE Exposure
Because of concerns related to exposure to commercial real estate (CRE) loans, the outlook on five regional banks in the United States has been downgraded to negative from stable by S&P Global Ratings. The firms in consideration are First Commonwealth Financial Corporation, M&T Bank Corporation MTB, Synovus Financial Corp. SNV, Trustmark Corporation TRMK and Valley National Bancorp VLY.
S&P stated, “The negative outlook revisions reflect the possibility that stress in CRE markets may hurt the asset quality and performance of the five banks, which have some of the highest exposures to CRE loans among banks we rate.”
After the collapse of Silicon Valley Bank and Signature Bank in early March 2023 (which sparked the regional banking crisis, leading to deposit flights despite regulators’ emergency actions to shore up confidence), investors started getting concerned over regional banks’ CRE exposure.
CRE became an area where borrowers were at increased risk due to high interest rates and low occupancies.
The Federal Reserve increased interest rates at the fastest pace in decades to contain the stubborn inflation, which slowed down credit demand. Thus, rating agencies started warning that the high interest rate environment made many banks with substantial unrealized losses not reflected in their regulatory capital ratios vulnerable to a loss of confidence.
In recent days, concerns that the slump in commercial property values could hurt U.S. regional banks intensified after various lenders signaled tensions in their portfolios.
As an example, this January, New York Community Bancorp, Inc. NYCB, which acquired parts of failed Signature Bank, had to set aside bigger-than-expected provisions for potential bad loans, mainly due to its CRE exposure. The company shocked shareholders by posting unexpected CRE loan losses in its fourth-quarter 2023 results and announcing a 71% cut in its quarterly dividend.
In the next month, NYCB started exploring the option of selling its portfolio of residential loans to reduce its mortgage risk amid mounting troubles.
A few weeks later, NYCB announced a $2.4 billion charge to write down goodwill that it had carried from past bank mergers, identified “material weaknesses” in its loan review process and quickly changed CEOs.
In early March, NYCB completed a deal that gave it a $1.05 billion capital infusion, following which it announced plans for a reverse stock split. However, it took a drastic measure to shore more liquidity, slashing its quarterly dividend again by 80% to a penny.
While some of the positive changes have been benefiting NYCB to some extent, a full reversal in its financial situation is not likely anytime soon.
Similar to NYCB, more lenders will likely have to take unexpected losses as higher borrowing costs and lingering low occupancy rates for office spaces could make borrowers default on loans.
Moreover, the latest move by S&P Ratings to lower the outlook on MTB, SNV, TRMK, VLY and First Commonwealth because of their CRE exposure has renewed investors’ concerns regarding the health of the industry.
Currently, TRMK carries a Zacks Rank #2 (Buy). MTB and SNV each carry a Zacks Rank #3 (Hold), while VLY and NYCB each carry a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.
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Synovus Financial Corp. (SNV) : Free Stock Analysis Report
M&T Bank Corporation (MTB) : Free Stock Analysis Report
Trustmark Corporation (TRMK) : Free Stock Analysis Report
New York Community Bancorp, Inc. (NYCB) : Free Stock Analysis Report
Valley National Bancorp (VLY) : Free Stock Analysis Report
