NYCB stock price halved due to bad loans
Japan Bank President Aozora: “I take responsibility and resign”
Bank insolvency caused by the U.S. commercial real estate downturn is surfacing, hitting not only the U.S. but also Japanese and European banks. The size of loans that mature this year alone is 720 trillion won, and it is diagnosed that many of them are at risk of becoming non-performing. As global banks announced in their recent earnings announcements that the commercial real estate crisis is becoming a reality due to poor performance, the stock prices of some banks fell by half in two days.
The epicenter of the fear is New York Community Bancorp (NYCB), a mid-sized U.S. bank. The stock price plunged 37.7% on the 31st of last month (local time) when it became known that it was exposed to concerns about the insolvency of real estate loans, including office buildings, and then fell 11.1% on the 1st. Japan’s Aozora Bank, Germany’s Deutsche Bank, and Switzerland’s Julius Baer Bank have also successively warned of losses from commercial real estate. Aozora Bank’s stock price has plummeted more than 32.4% in the past five days, and the bank president announced that he would resign to take responsibility. Bank President Julius Baer also resigned on the same day.
Anne Walsh, Chief Investment Officer (CIO) of Guggenheim Investment Management, said at the recent World Economic Forum (WEF, Davos), “The pain in commercial real estate has just begun,” and pointed out that the financial crisis could continue for some time.
‘Risk exposure’ Let NYCB increase provisions
Bank stocks fall the most since SVB bankruptcy
Crisis spreads to Japanese-American-Swiss banks… Direct and indirect shocks are expected in the domestic financial market as well.
Although four years have passed since the novel coronavirus infection (Corona 19) pandemic, global office buildings, including in the United States, are still suffering from high vacancy rates, high interest rates, and declining values. Last December, the 62-story Aon Center, one of Los Angeles’ landmark buildings, attracted attention when it was sold for 45% less than the purchase price in 2014.
The problem is that the loan maturity that building owners had put off as long as possible is coming back. According to data information company Trep, commercial real estate loans maturing in the U.S. this year amount to $544 billion (about 720 trillion won), and reach $2.2 trillion (about 2,907 trillion won) by the end of 2027. Mid-sized banks such as NYCB and Aozora Bank have been criticized for being vulnerable to risk as they often rely on specific portfolios. The Wall Street Journal (WSJ) reported on the 1st that “the commercial real estate crisis originating in the United States is hitting three continents, including the United States, Asia, and Europe.”
NYCB acquired Signature Bank, which went bankrupt last year following Silicon Valley Bank (SVB), and raised its assets to over $100 billion (approximately KRW 133 trillion) and was called the ‘winner of the banking crisis’. However, when NYCB announced in its earnings announcement on the 31st of last month that it had increased loan loss provisions to prepare for concerns about loan defaults not only for commercial real estate but also for apartment complex loans, which are subject to rent restrictions under New York City regulations, it immediately stimulated investors. There are concerns that NYCB could become the epicenter of the commercial real estate crisis.
Accordingly, credit rating agency Moody’s placed NYCB on a ‘credit rating downgrade review list’ that could downgrade it to speculative grade. Moody’s said, “It reflects unexpected losses, decreased profits, decreased capital, and increased proportion of marketable financing in the New York office and apartment real estate sector.”
Banking stocks across the board suffered a large decline for two days, with stock prices plummeting reminiscent of the SVB bankruptcy in March of last year. On the 31st of last month, the KBW Nasdaq Regional Bank Index (KRX) fell about 6%, the worst decline since SVB’s bankruptcy. KRX also fell 2.3% on the 2nd.
The sense of crisis is spreading to Japan, Germany, and Switzerland. On the 1st, Aozora Bank, a mid-sized Japanese bank, lowered its previous forecast of profit of 24 billion yen (approximately 217 billion won) to 28 billion yen due to losses from U.S. commercial real estate loans in the first quarter of this year (January to March). (about 253 billion won), which fell sharply to a net loss. The stock price fell 21% that day and plummeted 15.9% on the 2nd. Deutsche Bank, a global bank, also announced that it had increased its loan loss provisions for loans related to U.S. commercial real estate from 26 million euros (about 37.4 billion won) a year ago to 123 million euros (about 177 billion won).
The downturn in commercial real estate in Europe as well as the U.S. is leading to insolvency in the banking sector. Following the bankruptcy filing of European real estate conglomerate Cigna Group, Julius Baer Bank, one of Switzerland’s three largest banks, announced loan loss provisions of $700 million (approximately 930 billion won) on the 1st. The bank’s CEO Philipp Rickenbacher resigned immediately and decided to close the department that decided to lend to Cigna.
Wall Street believes that this situation will not lead to a drastic bank run (large-scale deposit withdrawal) or bankruptcy like the SVB bankruptcy last year, but that it will continue as a chronic problem for more than two years. Former Federal Reserve Director Elizabeth Duke diagnosed in a Bloomberg News interview, “When someone says, ‘(Insolvency) is everything,’ there is a high possibility that it is not everything in reality.”
It seems that the domestic financial market will not be able to avoid direct and indirect shocks. The soundness of domestic financial companies with large exposure to overseas real estate may also deteriorate. However, financial authorities believe that it is unlikely that losses from overseas real estate alternative investments will spread to a crisis in the domestic financial system as a whole.
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Source: Donga
Mark Jones is a world traveler and journalist for News Rebeat. With a curious mind and a love of adventure, Mark brings a unique perspective to the latest global events and provides in-depth and thought-provoking coverage of the world at large.