Regional and community banks have a unique problem: money to lend and not enough borrowers. We are a long way from March 2020, when banks were bracing for the possibility of a liquidity crisis and a wave of defaults.
âTheir biggest problem (the banks) by far is that they can’t lend the money that flows in,â said Dick Bove of Odeon Capital Group, a longtime banking analyst.
Lenders like the New York Community Bank, Signature Bank and M&T Bank derive much of their profits from commercial and multi-family home loans, a segment that has just returned after declining during the pandemic. In New York City, around $ 5.3 billion in commercial real estate deals were closed in the second quarter, up from $ 10 billion in the same period of 2019.
Small banks rely heavily on commercial real estate loans for their income, unlike financial supermarkets like JPMorgan Chase or Citigroup, which make money by negotiating and providing a range of services to individuals and businesses. The real estate industry is also heavily dependent on these regional lenders, among the most active providers of capital to multi-family homeowners in New York City, including owners of rent-regulated apartments.
While bank profits have been relatively strong, mostly exceeding analysts’ expectations, small homeowners who are their biggest customers face unprecedented challenges as state and federal eviction bans affect them. have left with non-paying tenants. Meanwhile, federal aid is slow to arrive.
Right of the tenant
But even before the pandemic, the business had changed due to New York’s 2019 tenant protection laws, making it more difficult to increase rents, evict tenants, or move units out of town. rent regulation.
This means fewer multi-family arrangements and fewer opportunities for lenders, said Tom Cornish, chief operating officer of BankUnited.
âThe underlying economic data is not as attractive as it was before all of these changes,â Cornish said in a recent interview with TRD.
BankUnited’s New York multi-family portfolio declined $ 225 million in the second quarter compared to the prior quarter. Executives at the bank said it had reduced the portfolio over the past five years.
âMultifamily in New York has been the headwind for us,â Raj Singh, CEO of BankUnited, said on the company’s latest earnings conference call.
Commercial real estate loans at Buffalo, New York-based M&T Bank rose only 1% to $ 37.5 billion in the second quarter from a year earlier, while the New York Community Bank saw its multi-family loans increase 3% to $ 32.5 billion, over the same period. .
Bank OZK, the Little Rock, Arkansas bank that made a name for itself by providing outsized construction loans to New York City developers after the financial recession, is now increasing lending in markets outside of New York. York.
“Although we have not seen the origins resume there [New York City] â¦ I think we’ll do more business there, âsaid Brannon Hamblen, president of the real estate division of Bank OZK, during the second quarter earnings call.
Some banks are turning to acquisitions to diversify their loan portfolios.
In April, New York Community Bancorp, the city’s largest apartment lender, agreed to acquire Michigan-based Flagstar Bancorp in a deal valued at $ 2.6 billion. The acquisition would reduce its concentration of multi-family loans to 56% from around 75%, according to an investor presentation. Buffalo, New York-based M&T Bank, another lender active in the New York multi-family space, agreed to acquire Bridgeport, Connecticut-based People’s United Financial for $ 7.6 billion in February.
âThis is the year of mergerâ for regional banks, said Ken Thomas, independent banking analyst and former professor of finance at the Wharton School of Business at the University of Pennsylvania.
Unlike the financial crisis, when regional banks such as Chicago-based Corus Bank went bankrupt after large out-of-state construction loans turned sour, the pandemic has yet to take hold. bank victims. Shortly after its debut, the Federal Reserve quickly intervened to take the pressure off the banks by pledging to buy hundreds of billions of dollars in mortgage-backed securities.
The great unknowns
But for banks, especially homeowner lenders, there are still many unknowns. The moratorium on evictions and foreclosures has forced banks to defer loans, leaving it unclear how many are actually in default.
Over the past year, M&T reported that late-stage delinquent loans – comprised mostly of residential real estate debt – had more than doubled. As of June 30, 2020, M&T had $ 535 million in overdue loans over 90 days; this year, the company grossed $ 1.1 billion.
On top of that, banks could be in line for tighter regulation under President Biden and a new Federal Reserve chairman. This could lead to changes in the capital requirements of banks and make it more difficult to obtain approval for mergers and acquisitions.
âBanking is the most regulated industry in the world,â said Thomas, the banking analyst. “When regulators change from a deregulated Trump environment to a re-regulated environment, bankers will follow that.”