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Regionals in Flux: Powell's Insights & the Small Bank Challenge
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U.S. Federal Reserve Chairman Jerome Powell recently sat down for an interview with Scott Pelley on the hit CBS show “60 Minutes.” Below is a particular part of the interview that caught my eye:
Pelley: The value of commercial office buildings all across the country is dropping as people work from home. Those buildings support the balance sheet of banks all across the country. What is the likelihood of another real estate-led banking crisis.
Powell: I don’t think that that’s likely. So, what’s happening is, as you point out, we have work-from-home, and you have weakness in office real estate, and also retail, downtown retail. You have some of that. And there will be losses in that.
We looked at the larger banks’ balance sheets, and it appears to be a manageable problem. There’s some smaller and regional banks that have concentrated exposures in these areas that are challenged.
And you know, we’re working with them. This is something we’ve been aware of for, you know, a long time, and we’re working with them to make sure that they have the resources and a plan to work their way through the expected losses. There will be expected losses.
Later in the interview Powell continued, “There will be certainly – there will be some banks that have to be closed or merged out of, out of existence because of this. That’ll be smaller banks, I suspect, for the most part. You know, these are losses. It’s a secular change in the use of downtown real estate. And result will be losses for the owners and for the lenders, but it should be manageable.
Below are three critical takeaways from the interview:
1. Banking issues are not systemic: Powell repeatedly plead his case that this is not another 2008 and is instead concentrated on one part of the banking sector.
2. Powell is willing to allow small, weak banks to fail: This sentiment appears to be a change from when the Fed Reserve stepped in to assist failing banks in 2023. In addition, the Federal Reserve Board terminated the Bank Term Funding Program (BTFP), and thus it appears they are willing to let free markets sort out the banking mess.
3. Large Banks are not in Danger: There is a significant bifurcation between big banks and small banks.
New York Community Bank: Avoid This Stock
Zacks Rank #5 (Strong Sell) stock New York Community Bancorp ((NYCB - Free Report) ) is mainly a producer of multi-family loans and an originator of Commercial Real Estate (CRE) loans in New York City. Regarding its market cap ($2 billion), location focus (NYC), and business focus (CRE), it is precisely the type of company that Jerome Powell is warning about (and I assume he knows much more than the average investor).
Bleek EPS Future Expected
Last quarter, NYCB fell short of Zacks Consensus Estimates by an abysmal 192%.
Image Source: Zacks Investment Research
Over the next two quarters, it’s not looking much better, and Zacks Consensus Estimates suggest EPS growth will plunge by double-digits year-over-year.
Image Source: Zacks Investment Research
Troubling Price Action
Leading up to one-time Wall Street darling Enron’s collapse in 2001, the stock showed troubling relative weakness (underperformance) versus the market. NYCB has exhibited troubling relative weakness versus the market for months and the Regional Banking ETF ((KRE - Free Report) ). Investors should never discount relative weakness as it illustrates real money changing hands.
Image Source: Zacks Investment Research
Sky-high Debt-to-Equity
NYCB has a debt/equity ratio of 206. A higher number, like 206, means NYCB has a lopsided balance sheet and will need to make changes quickly.
Image Source: Zacks Investment Research
Bottom Line
Investors should avoid regional banking stocks with Commercial Real Estate exposure. Instead, investors should gravitate toward high-quality large banks such as JP Morgan ((JPM - Free Report) ),Goldman Sachs ((GS - Free Report) ), and Bank of America ((BAC - Free Report) ).
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Regionals in Flux: Powell's Insights & the Small Bank Challenge
U.S. Federal Reserve Chairman Jerome Powell recently sat down for an interview with Scott Pelley on the hit CBS show “60 Minutes.” Below is a particular part of the interview that caught my eye:
Pelley: The value of commercial office buildings all across the country is dropping as people work from home. Those buildings support the balance sheet of banks all across the country. What is the likelihood of another real estate-led banking crisis.
Powell: I don’t think that that’s likely. So, what’s happening is, as you point out, we have work-from-home, and you have weakness in office real estate, and also retail, downtown retail. You have some of that. And there will be losses in that.
We looked at the larger banks’ balance sheets, and it appears to be a manageable problem. There’s some smaller and regional banks that have concentrated exposures in these areas that are challenged.
And you know, we’re working with them. This is something we’ve been aware of for, you know, a long time, and we’re working with them to make sure that they have the resources and a plan to work their way through the expected losses. There will be expected losses.
Later in the interview Powell continued, “There will be certainly – there will be some banks that have to be closed or merged out of, out of existence because of this. That’ll be smaller banks, I suspect, for the most part. You know, these are losses. It’s a secular change in the use of downtown real estate. And result will be losses for the owners and for the lenders, but it should be manageable.
Below are three critical takeaways from the interview:
1. Banking issues are not systemic: Powell repeatedly plead his case that this is not another 2008 and is instead concentrated on one part of the banking sector.
2. Powell is willing to allow small, weak banks to fail: This sentiment appears to be a change from when the Fed Reserve stepped in to assist failing banks in 2023. In addition, the Federal Reserve Board terminated the Bank Term Funding Program (BTFP), and thus it appears they are willing to let free markets sort out the banking mess.
3. Large Banks are not in Danger: There is a significant bifurcation between big banks and small banks.
New York Community Bank: Avoid This Stock
Zacks Rank #5 (Strong Sell) stock New York Community Bancorp ((NYCB - Free Report) ) is mainly a producer of multi-family loans and an originator of Commercial Real Estate (CRE) loans in New York City. Regarding its market cap ($2 billion), location focus (NYC), and business focus (CRE), it is precisely the type of company that Jerome Powell is warning about (and I assume he knows much more than the average investor).
Bleek EPS Future Expected
Last quarter, NYCB fell short of Zacks Consensus Estimates by an abysmal 192%.
Image Source: Zacks Investment Research
Over the next two quarters, it’s not looking much better, and Zacks Consensus Estimates suggest EPS growth will plunge by double-digits year-over-year.
Image Source: Zacks Investment Research
Troubling Price Action
Leading up to one-time Wall Street darling Enron’s collapse in 2001, the stock showed troubling relative weakness (underperformance) versus the market. NYCB has exhibited troubling relative weakness versus the market for months and the Regional Banking ETF ((KRE - Free Report) ). Investors should never discount relative weakness as it illustrates real money changing hands.
Image Source: Zacks Investment Research
Sky-high Debt-to-Equity
NYCB has a debt/equity ratio of 206. A higher number, like 206, means NYCB has a lopsided balance sheet and will need to make changes quickly.
Image Source: Zacks Investment Research
Bottom Line
Investors should avoid regional banking stocks with Commercial Real Estate exposure. Instead, investors should gravitate toward high-quality large banks such as JP Morgan ((JPM - Free Report) ), Goldman Sachs ((GS - Free Report) ), and Bank of America ((BAC - Free Report) ).