The US commercial real estate crisis is spreading. Starting in February, the financial reports of banks such as New York Community Bank (NYCB) and Aozora Bank have been affected by the drag of commercial loans, leading to a sharp drop in stock prices. The market is watching whether this crisis will cause a major storm in the banking industry.
New York Community Bank has suffered a loss of $252 million! Arthur Hayes: Bitcoin may repeat last year’s “fall and rise” trend.
In the background, the stock price of New York Community Bank plummeted by 40%, and Signature Bank, which took over, is struggling to survive.
Table of Contents:
New York Community Bank also suffers from bad debt.
Charlie Munger warned of a commercial real estate storm in the United States.
Muddy Waters: Blackstone’s mortgage loan trust fund may face a liquidity crisis.
The US banking industry is in turmoil in February. Aozora Bank, headquartered in Tokyo and ranked 16th in Japan by market value, released its financial report on the 1st, lowering its full-year profit forecast from 24 billion yen to a net loss of 28 billion yen. Such an exaggerated contrast caused its stock price to plummet by more than 21% on the 1st and continue to decline by over 17% on the 2nd, with a total market value evaporating approximately $870 million.
Bloomberg reported that Aozora Bank aggressively expanded overseas ten years ago, with one-third of its loans located outside Japan. In November last year, the bank’s president, Kei Tanikawa, assured investors that it did not need a large amount of additional reserves to deal with bad debt in commercial real estate. However, in the financial report released on Friday, he announced the need for an additional allocation of 32.4 billion yen ($221 million) in reserves, showing tremendous financial pressure.
Tanikawa announced that he will step down on April 1st to take responsibility for this. It is rumored that Aozora Bank has bad debt of $719 million in the entire US commercial real estate market. It is worth mentioning that this real estate storm is not only spreading in the United States, but even Deutsche Bank in Europe is increasing its bad debt reserves four times to $123 million.
On the same day that Aozora Bank collapsed, New York Community Bank, which acquired crypto-friendly bank Signature Bank last year, also shocked the market by reporting a huge loss of $252 million in its Q4 financial report, causing its stock price to plummet by over 40% at the opening.
Market analysis believes that the deterioration of the US commercial real estate market is the main reason for the bank’s loss in the last quarter. New York regional banks increased their bad debt reserves from $62 million to $552 million in the fourth quarter, more than ten times the analysts’ expectations. They did this to deal with the bad debt risks of commercial and real estate loans, although the bank’s top management tried to explain this move as a result of the asset size surpassing $100 billion and the need to meet stricter liquidity requirements.
However, this negative news caused the bank’s stock price to plunge more than 40% on Thursday and the KBW Nasdaq Regional Bank Index to fall 6% on the 1st, the largest drop since the Silicon Valley Bank collapsed in March last year.
In fact, Charlie Munger, the vice chairman of Berkshire Hathaway and a close friend of Warren Buffett, warned in May last year that the US commercial real estate market was brewing a storm. As real estate prices fell, US banks were “flooded with bad loans”, and he predicted that the banking industry would suffer, but the situation would not be as bad as the 2008 financial crisis.
Business Insider pointed out that the prices of US commercial offices have been declining in recent years. In addition to the decrease in demand for offices due to the rise of remote work caused by Covid-19, the continuous interest rate hikes by the Federal Reserve have led to increasing loan interest rates. This puts banks with a large amount of commercial loans at the forefront of this storm, and regional banks are much more exposed than large banks. A report found that commercial real estate loans account for 28.7% of small banks’ investment portfolios, while large banks only have 6.5%.
It is not only the banking industry that may be affected by the commercial real estate crisis. According to the Financial Times, in December last year, Carson Block, a well-known short-selling institution, Muddy Waters, revealed that the hedge fund is bearish on the mortgage loan trust fund BXMT managed by private equity giant Blackstone Group, and that the fund may have bad debt of up to $2.5 to $4.5 billion. He also predicted that the trust fund will have to “significantly reduce dividends” by mid-next year and face a liquidity crisis caused by the commercial real estate storm.
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