New York Community Bancorp (NYCB), a major U.S. regional bank, received a critical $1 billion capital infusion last month amidst challenges including a 7% drop in deposits, difficulties from recent acquisitions, and a stressed commercial real estate portfolio. 

The bailout, led by former Treasury Secretary Steven Mnuchin and a group of equity investors, offered a ray of hope for the sector. 

While NYCB avoided a bank run and received a bailout, the broader U.S. banking sector remains at risk, with the number of “problem banks” rising, reflecting ongoing challenges in consumer and commercial credit, and a cautious outlook for the economy due to tightened lending practices.

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Last month, New York Community Bancorp (NYCB) – one of the nation’s largest regional banks – received a $1 billion capital boost.

The bank had been on shaky ground. Its deposits were down roughly 7% from February. It was grappling with the digestion of two recent acquisitions. And its commercial real estate portfolio had become a continued source of stress.

It looked like NYCB could be the next big bank to fail…  

So, in a rescue mission led by former Treasury Secretary Steven Mnuchin, a group of equity investors stepped in with a billion-dollar cash infusion.

The move was a surprising glimmer of hope for U.S. regional banks. And the company’s bailout draws a line under the issues at NYCB.

However, it’d be foolish to think that the banking crisis that began a little more than a year ago with the collapse of Silicon Valley Bank (“SVB”) is over. 

NYCB wasn’t part of the string of regional banks that began failing in March 2023. The bank seemed to be capitalizing on the opportunity… picking up parts of Signature Bank after it was shut down.

However, that growth may have exacerbated underlying issues the company was facing. NYCB had already acquired mortgage servicer Flagstar Bancorp in 2022, and the rapid growth was beginning to become unsustainable.  

These deals pushed NYCB above the $100 billion asset mark, placing the company into a stricter regulatory category much quicker than it was ready for. It had only crossed the $50 billion mark five years prior in 2018.

With tighter regulation came greater reserve requirements… NYCB had to put aside more cash to ensure it could meet its liabilities. And that’s despite the greater balance-sheet obligations it took on from Signature Bank.

The timing could not have been worse.

Today, commercial real estate is suffering from record-level delinquency rates. This past January, NYCB announced loan-loss provisions that were 10 times analyst expectations. This coincided with a 70% dividend cut, ringing the warning bell for the bank’s shareholders and the sector as a whole.

NYCB’s stock plummeted 38% on the day of the announcement.

Ironically, NYCB found itself in a similar situation to Signature Bank and SVB, as it was forced to seek equity financing. 

Lucky for NYCB, though, a bank run never occurred. Even luckier, it received a bailout.

Unfortunately, this safety net isn’t big enough for the rest of the banking sector…

Last month, the Federal Deposit Insurance Corporation (“FDIC”) came out with its latest list of “problem banks” in the U.S.

The number of problem banks rose by 8 to 52 at the end of 2023. That’s still way below the all-time high of 888 in 2008, but it’s been a steady rise since bottoming at 39 in the fourth quarter of 2022.

NYCB wasn’t even on the list… And with growing issues from consumer credit, commercial real estate, and corporate credit, those numbers are only likely to worsen from here.

While the number of firms on the FDIC’s problem list pales in comparison to the historical highs that followed the 2008 financial crisis, it’s concerning that the number jumped by almost 25% in a quarter.  

In terms of commercial real estate properties, late payments on properties that aren’t owner-occupied are at their highest levels since 2014.

Consumer credit is following in parallel, with delinquent credit cards at their highest level since 2011.

Credit is the lifeblood of the economy and it’s tough to have a healthy and growing economy if the credit market is under serious pressure.

As banks face ongoing challenges and work on strengthening their balance sheets, they’re likely to limit the amount of money they lend out.

The U.S. economy is already sitting on a mountain of debt. Banks are pulling back on consumer loans, as well as commercial and industrial loans.  And their lending standards are still at recession levels, according to the Senior Loan Officer Opinion Survey.  

Therefore, despite the current market mania, the handicap on lending is going to continue to slow growth.

If the problem bank list keeps growing like it has been, investors will realize that the market is risky today.

This is a reason to continue to be cautious with the current nose-bleed valuations for some of the biggest companies in the world.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research