Over a dozen U.S. banks are finding themselves under the scrutiny of financial watchdogs due to their substantial portfolios of commercial real estate (CRE) loans.
The Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency have expressed their intent to inspect banks whose CRE loan portfolios exceed triple their capital and have experienced over 50% growth in the past three years.
New York Community Bancorp, Inc NYCB has managed to evade the intensifying scrutiny. Despite a CRE loan to total capital ratio of 462% — surpassing the regulatory threshold of 300% — NYCB’s portfolio growth of 25% over the past five years keeps it below the critical 50% growth threshold that regulators find alarming.
This distinction is particularly remarkable in view of NYCB’s recent underperformance and increased investor scrutiny following a lackluster earnings report earlier this month.
Heightened Focus on Regional Banks
A Bloomberg analysis of federal data spanning over 350 bank holding companies has highlighted numerous smaller lenders attracting increased regulatory scrutiny as they have rapidly assembled significantly large concentrations in their CRE portfolios in recent years.
Valley National Bancorp VLY is identified as the largest institution meeting the criteria for heightened regulatory examination, with a staggering 80% growth in CRE loans over the past three years and an exposure that constitutes 471% of its total capital.
In addition to Valley National, several other banks such as HomeStreet Inc. HMST, First Foundation Inc. FFWM, Dime Community Bancshares Inc. DCOM, Bridgewater Bancshares Inc. BWB, and others are slated for closer inspection by regulators.
Response from the Market
Despite the regulatory cloud hanging over these institutions, the broader regional bank industry, as monitored by the SPDR S&P Regional Banking ETF KRE, witnessed a 2.4% uptick on Thursday.
This surge is attributed to a confluence of factors, including some positive news derived from the latest 13F filings and the market anticipation of Federal Reserve rate cuts prompted by disappointing retail sales data.
In the fourth quarter of 2023, a couple of renowned fund managers added exposure to New York Community Bancorp. Notable among them is Soros Fund Management, which escalated its stake to 1,476,180 shares, valued at $15 million by the quarter’s end. Similarly, AQR Capital Management and Millennium Management substantially increased their holdings in New York Community Bancorp.
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