US regional banks to face increased scrutiny as CRE exposure stifles buybacks
By Manya Saini
July 10 (Reuters) - U.S. regional banks will probably stockpile more rainy-day funds and stay conservative on stock buybacks as losses from commercial real estate (CRE) loans are expected to pressure their earnings, analysts said.
As regional lenders prepare to report second-quarter results next week, they continue to face tough scrutiny from investors over potential weakness from CRE and commercial borrowers.
Regional bank stocks have lagged the broader market on concerns that high interest rates will deter borrower demand and weigh on profits for most of 2024.
Problems related to CRE loans at regional lender New York Community Bancorp NYCB.N earlier this year, and more recently First Foundation FFWM.N, have put the spotlight on default risks.
"CRE portfolios mature gradually over time and losses tend to be lumpy," analysts at Morgan Stanley led by Manan Gosalia wrote in a note.
"We expect higher for longer rates will continue to pressure credit quality for the next several quarters pushing more banks to build loan loss reserves through 2024," they added.
The largest U.S. banks will kick off the earnings season on Friday. Smaller regional rivals will follow suit in the weeks after. Analysts expect profits to decline broadly as banks set aside more money to cover deteriorating loans, while they earn less from interest payments due to weak loan demand.
U.S. Federal Reserve Chair Jerome Powell said on Tuesday that CRE risks will be with banks for years, and regulators were in touch with smaller banks to make sure they are able to manage those risks.
Regional banks have also shifted toward making more risky loans. They now hold a larger share of non-investment grade corporate loans, which are more than three times more likely to default than investment grade loans, according to the Fed.
The Fed projected total loan losses for banks to reach up to $571 billion under a severe scenario in itsannual stress tests last month.
Tough stress test results could weigh on regional banks' abilities to buy back stock, analysts at Jefferies led by Ken Usdin wrote in a note.
"Acute CRE pressures (mostly in office) and ongoing credit card normalization are driving losses higher in 2024," they wrote.
PROLONGED CRE STRESS
The future path of U.S. interest rates has also heightened uncertainty for lenders pursuing distressed sales of CRE assets. Lenders have been trying to shed CRE loan portfolios by selling them to non-bank buyers such as private equity firms.
"The regional commercial real estate market is not showing much by way of a revival, and the Fed is yet to cut interest rates, which will help neither the regional banks' CRE loan book or the value of their U.S. Treasury holdings," Russ Mould, investment director at UK-based investment firm AJ Bell, told Reuters.
CRE property prices continued to decline at the end of the first quarter, albeit at a slower pace, according to a Morgan Stanley report. Prices fell 3% from a year earlier, it said.
Meanwhile, distressed CRE sales increased to 3.9% of the total CRE sales at the end of the first quarter, the highest share since the end of 2015.
Shares of bankswith big exposures to CRE and multi-family properties, particularly in New York and other major metropolitan areas, are "easy targets" for short sellers, Raymond James analysts said.
The KBW Regional Banking Index .KRX has shed about 11%so far this year. In contrast, an index tracking larger lenders .SPXBK is up about 18%.
Banks expected to build up rainy-day funds https://reut.rs/3RUVQug
Profit growth squeezed at US regional banks https://reut.rs/3xWOnUr
Stock performance of major regional banks YTD https://reut.rs/3YdtaRd
Reporting by Manya Saini and Niket Nishant in Bengaluru and Saeed Azhar in New York, editing by Lananh Nguyen and Anil D'Silva
Relaterade tillgångar
Senaste nytt
Ansvarsfriskrivning: XM Group-enheter tillhandahåller sin tjänst enbart för exekvering och tillgången till vår onlinehandelsplattform, som innebär att en person kan se och/eller använda tillgängligt innehåll på eller via webbplatsen, påverkar eller utökar inte detta, vilket inte heller varit avsikten. Denna tillgång och användning omfattas alltid av i) villkor, ii) riskvarningar och iii) fullständig ansvarsfriskrivning. Detta innehåll tillhandahålls därför uteslutande som allmän information. Var framför allt medveten om att innehållet på vår onlinehandelsplattform varken utgör en uppmaning eller ett erbjudande om att ingå några transaktioner på de finansiella marknaderna. Handel på alla finansiella marknader involverar en betydande risk för ditt kapital.
Allt material som publiceras på denna sida är enbart avsett för utbildnings- eller informationssyften och innehåller inte – och ska inte heller anses innehålla – rådgivning och rekommendationer om finansiella frågor, investeringsskatt eller handel, dokumentation av våra handelskurser eller ett erbjudande om, eller en uppmaning till, en transaktion i finansiella instrument eller oönskade finansiella erbjudanden som är riktade till dig.
Tredjepartsinnehåll, liksom innehåll framtaget av XM såsom synpunkter, nyheter, forskningsrön, analyser, kurser, andra uppgifter eller länkar till tredjepartssajter som återfinns på denna webbplats, tillhandahålls i befintligt skick, som allmän marknadskommentar, och utgör ingen investeringsrådgivning. I den mån som något innehåll tolkas som investeringsforskning måste det noteras och accepteras att innehållet varken har varit avsett som oberoende investeringsforskning eller har utarbetats i enlighet med de rättsliga kraven för att främja ett sådant syfte, och därför är att betrakta som marknadskommunikation enligt tillämpliga lagar och föreskrifter. Se till så att du har läst och förstått vårt meddelande om icke-oberoende investeringsforskning och riskvarning om ovannämnda information, som finns här.
