NYCB’s Credit Is Now Junk. Its Stock Fell 60% This Week. What Does This All Mean For CRE?

New York Community Bank named a new executive chairman Wednesday in the wake of a Moody's Investors Service report that cut the bank's credit to junk status as the bank's stock closed the day down 60% from one week earlier.

Former Flagstar Bancorp Inc. CEO Alessandro DiNello will now serve as executive chairman of the struggling NYCB. DiNello attempted to reassure investors and stockholders that deposits have increased since 2023 and the bank holds a "strong liquidity position," as reported by CNN Business.

The bank's stock fluctuated Wednesday, ticking up then falling again, but around 2 p.m. ET, the stock’s decline halted and it ultimately closed about 6.7% higher, at $4.48, CNN reported.

The bank's credit was cut two levels to Ba2 in a report published Tuesday evening, with Moody's citing losses in office and multifamily properties in New York City, Bloomberg reported. Investors on Tuesday continued to dump shares in the wake of the bank's most recent earnings report, which showed deep losses connected to commercial real estate.

NYCB’s fourth-quarter earnings report revealed a $252M loss related to real estate loans on their books. The bank also announced it was cutting its dividend by 70% and building its reserves to weather future loan losses, Bisnow previously reported. 

The earnings call kicked off a multiday streak of the bank’s stock diving. On Jan. 30, the day before the earnings call, NYCB stock was trading at $10.37. On Tuesday, it was trading at $4.20 — a drop of nearly 60% in about a week. 

What do one bank’s financial woes have to do with commercial real estate? 

NYCB is the latest bank to be squeezed by turmoil in CRE, but its fourth-quarter losses were directly related to commercial real estate and the larger issues facing the industry. Two loans on NYCB’s books, one for an office building and another for a residential co-op, were responsible for $185M in losses, according to the New York Times. 

The bank also dramatically increased its estimates for unrecoverable debts, also called credit losses, to $552M — a 790% increase from the previous quarter’s $62M, Bisnow reported. 

As of the end of December 2023, NYCB’s commercial loans represented 46% of total loans, while multifamily loans represented 44% of total loans, NYCB executives said on a Q4 earnings call Jan. 31. Those multifamily loans are on rent-regulated buildings in New York, according to a presentation that accompanied the call show. 

Does this have anything to do with Signature Bank’s collapse last year?  

It’s been almost a year since the failure of Signature Bank, which was the third-biggest bank failure in history and a major holder of commercial real estate loans. New York Community Bank bought the failed Signature Bank at auction in early 2023 and, in doing so, grew to hold more than $100B in assets, making it subject to certain regulations that did not affect it before. 

The trouble bubbling up in the regional banking sector due to pressures on commercial real estate is still very much present. 

Why does this keep happening? 

Regional banks have more exposure to commercial real estate loans than their larger counterparts. Among banks with less than $100B in assets, which NYCB was before it took on Signature’s assets, CRE loans account for 44% of total bank credit, whereas these loans make up 13% of total credit for banks with more than $100B in assets. 

As CRE loans come to maturity in a higher interest rate environment, and with the values of many properties, especially offices, in question, they may have difficulty refinancing their properties or paying their debts. 

Could other banks be in trouble soon? 

Banks generally face about $560B in CRE maturities by the end of 2025, Bloomberg reported.

Regional lenders are not only more exposed to CRE, they lack some of the elements of larger banks, such as an investment banking business, that could cushion the blow of declining values or defaults as loans mature but cannot be refinanced by borrowers. 

Following the news about NYCB, investor confidence in regional banks has certainly been shaken, impacting the stock prices of other, similarly sized banks. Shares of other regional banks, critical lenders for commercial real estate, have dropped an average of 10% over the last week, the New York Times reported, citing the KBW regional bank index.

Federal Reserve Chair Jerome Powell told CBS’ 60 Minutes that commercial real estate’s negative impact on the banking sector is at once a “manageable problem,” a “sizable problem” and “a problem we'll be working on for years.”

U.S. Treasury Secretary Janet Yellen told U.S. Congress on Tuesday that refinancings of commercial real estate loans "is going to put a lot of stress on the owners of these properties." 

Some banks may come under stress due to lower demand for CRE following a global pandemic that caused more people to work from home, but bank managers were "very focused" on helping their institutions manage the risks, Yellen said.

"I'm concerned. I believe it's manageable, although there may be some institutions that are quite stressed by this problem," Yellen said.

UPDATE, FEB. 7, 6 P.M. ET:This story has been updated to include new information about NYCB’s stock price changes.

UPDATE, FEB. 7, 1 P.M. ET: This story has been updated to include the appointment of NYCB's new executive chairman and stock price changes.