Beware the Ides of March

If you’re a bank with bad news, it can often portend more bad news. New York Community Bancorp is caught in that vicious cycle.

March brings the anniversary of last year’s regional bank turmoil, and NYCB just offered a reminder of those days. The bank on Thursday reported material weaknesses in its financial statements and that its CEO had stepped down. The stock was already down more than 50% this year given its ties to a battered commercial property sector. On Friday its shares fell as much as 30% at the open.

NYCB is looking to stem the pain—even pledging a new chapter. “While we’ve faced recent challenges, we are confident in the direction of our bank,” Alessandro DiNello, the new chief executive officer, said in a statement late Thursday. His team was adamant that customers haven’t been yanking funds.

Yet “uncertainty is the enemy of bank stock investing,” Piper Sandler analysts led by Mark Fitzgibbon wrote in a note to clients. The team downgraded the stock to the equivalent of a “hold” rating. “Without a doubt, the situation feels a bit uncertain at NYCB right now. We fear that there could be additional issues that get raised.”

The irony of NYCB’s challenges is that it emerged late last year as one of the bigger winners when other banks struggled. It acquired a portfolio of Signature Bank assets after that lender’s collapse, and its assets have swelled quickly, in a mere 18 months after acquiring Flagstar Bancorp in late 2022.

Those who think NYCB’s problems are isolated point to its outsize exposure to New York’s property market, where rent-regulated apartments are creating trouble for banks. But it’s also exposed to office buildings, which are causing issues for lenders at a level that’s virtually incalculable given the potential years of stress ahead.

Regulators already looked pretty silly from the collapses of Silicon Valley Bank, Signature Bank and Silvergate Bank, only to be followed by another of the largest bank failures in history in First Republic Bank. Many of their problems had been flagged early on.

Regulators allowed NYCB to grow rapidly into its latest set of challenges. NYCB’s essentially doubling in size put it under new scrutiny, which led the bank to slash its dividend in January and stockpile reserves to back the risky property loans it held. That kicked off this round of fears about the bank.

So while regulators have been relying heavily on their greatest “fix” to the banking system—forcing lenders to put aside more capital as a cushion for troubles—they’re now facing other large questions. Have they missed more problems? Have they messed up in reforming rules around bank mergers? How will they resolve troubled bank resolutions in the future?

Clearly, the capital constraints haven’t done the job, and in some cases have created more problems for regional banks. March roars like a lion once again.

Private Credit Opportunities

Smaller banks’ pain may allow some very large investors to put their money to work. The stresses in the property sector are finally creating opportunities for private credit firms to bite.

Alan Waxman, chief executive officer of Sixth Street Partners, said there’s still a meaningful amount of tumult in commercial real estate—and his firm is ready to bet big on the industry. “The last few years, we haven’t really done that much, because we thought valuations got way too speculative,” he said in an exclusive television interview kicking off our coverage for Bloomberg Invest. “We’re sitting with a pretty clean portfolio.”

When asked if he’d step into some of the harder hit areas of commercial real estate, such as office buildings, he said there’s a way to price in risk that makes sense. That’s code for: Interest costs can be higher—maybe much higher—for those types of risky borrowers.

Private credit firms, which lock up investor money for years, might also be a better option for borrowers who have a long time frame, rather than smaller banks that are beholden to a somewhat flighty deposit base.

That’s pushing some banks to partner with their nonbank rivals. Waxman said he’d be open to such tie-ups but isn’t really looking. Marc Lipschultz, the co-CEO of Blue Owl Capital, also said it’s something he’d consider.

“They have a certain set of corporate relationships that are very powerful,” Lipschultz told me this week in a separate TV interview. Banks can “do a lot for those companies that we don’t do, they do things like foreign exchange, and do things like cash management,” he said. “We on the other hand are a very much natural and much steadier home for the liability, so to speak, for the loan. We buy and hold loans, we have long-term capital for long-term needs.

And more on credit, don't miss my exclusive conversation with Goldman's Christina Minnis, who sees her market reopening further as LBOs start to make a bigger comeback. You can find that conversation for Bloomberg New Voices here.

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