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
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إخلاء المسؤولية: تتيح كيانات XM Group خدمة تنفيذية فقط والدخول إلى منصة تداولنا عبر الإنترنت، مما يسمح للشخص بمشاهدة و/أو استخدام المحتوى المتاح على موقع الويب أو عن طريقه، وهذا المحتوى لا يراد به التغيير أو التوسع عن ذلك. يخضع هذا الدخول والاستخدام دائماً لما يلي: (1) الشروط والأحكام؛ (2) تحذيرات المخاطر؛ (3) إخلاء المسؤولية الكامل. لذلك يُقدم هذا المحتوى على أنه ليس أكثر من معلومات عامة. تحديداً، يرجى الانتباه إلى أن المحتوى المتاح على منصة تداولنا عبر الإنترنت ليس طلباً أو عرضاً لدخول أي معاملات في الأسواق المالية. التداول في أي سوق مالي به مخاطرة عالية برأس مالك.
جميع المواد المنشورة على منصة تداولنا مخصصة للأغراض التعليمية/المعلوماتية فقط ولا تحتوي - ولا ينبغي اعتبار أنها تحتوي - على نصائح أو توصيات مالية أو ضريبية أو تجارية، أو سجلاً لأسعار تداولنا، أو عرضاً أو طلباً لأي معاملة في أي صكوك مالية أو عروض ترويجية مالية لا داعي لها.
أي محتوى تابع للغير بالإضافة إلى المحتوى الذي أعدته XM، مثل الآراء، والأخبار، والأبحاث، والتحليلات والأسعار وغيرها من المعلومات أو روابط مواقع تابعة للغير وواردة في هذا الموقع تُقدم لك "كما هي"، كتعليق عام على السوق ولا تعتبر نصيحة استثمارية. يجب ألا يُفسر أي محتوى على أنه بحث استثماري، وأن تلاحظ وتقبل أن المحتوى غير مُعدٍ وفقاً للمتطلبات القانونية المصممة لتعزيز استقلالية البحث الاستثماري، وبالتالي، فهو بمثابة تواصل تسويقي بموجب القوانين واللوائح ذات الصلة. فضلاً تأكد من أنك قد قرأت وفهمت الإخطار بالبحوث الاستثمارية غير المستقلة والتحذير من مخاطر المعلومات السابقة، والذي يمكنك الاطلاع عليه هنا.
