What does the sharp drop in bank stocks from New York to Tokyo mean? A $560 billion headache

This Wednesday, New York Community Bancorp unexpectedly reported a loss in the fourth quarter of 2023, with dividends being cut by more than two-thirds. The stock price plummeted nearly 38% in a single day, marking the largest drop in the company's 30-year history. On Thursday, Aozora Bank Ltd., a Japanese bank, also reported a financial disaster, with an expected net loss of 28 billion yen ($191 million) for the full fiscal year, compared to the previous forecast of a profit of 24 billion yen. The bank's stock price dropped more than 20% on the same day.

Commentators believe that the sharp decline in these bank stocks indicates that although the U.S. commercial real estate market has been in turmoil since the outbreak of the COVID-19 pandemic, banks are just beginning to feel the pain caused by this market.

Wall Street CN previously mentioned that the main reason for NYCB's loss in the fourth quarter was the provision for loan losses, which reached $552 million, far exceeding market expectations and the $62 million in the previous quarter, reflecting a deterioration in credit prospects. Jon Arfstrom, an analyst at RBC Capital Markets, pointed out that NYCB's management had previously stated that asset quality was strong, so "their tone has clearly changed," and this is a substantial negative surprise.

Aozora stated on Thursday that the bank's huge loss for the fiscal year was due to additional provisions for U.S. real estate loans and losses from the sale of overseas bonds. In the third quarter, the bank made an additional provision of 3.24 billion yen for non-performing loans related to U.S. office real estate.

Also on Thursday, Deutsche Bank, Germany's largest bank, disclosed that its loss provisions for U.S. commercial real estate in the fourth quarter of 2023 increased more than fourfold year-on-year. The bank set aside 123 million euros ($133 million) for its related investment portfolio, far exceeding the 26 million euros in the same period of 2022, nearly double the amount of provisions in the bank's third quarter of 2023.

Commentators believe that the market's concerns about banks reflect the continuous decline in the market value of commercial real estate against the backdrop of the COVID-19 pandemic, which has sparked the trend of remote work and rapid interest rate increases. It is also difficult to predict which loans may be canceled, and the refinancing costs for lending banks have increased.

Barry Sternlicht, billionaire investor and CEO of investment fund Starwood Capital, warned on Tuesday that the office market could face losses of over $1 trillion. He described it as a market that will never recover since the pandemic, stating that this asset class was previously valued at $30 trillion and may now only be worth $18 trillion.

Commentators believe that the more troubling issue for banks is the possibility of more loan defaults related to real estate in the future.

Harold Bordwin, co-president of Keen-Summit Capital Partners LLC, an expert in non-performing asset disposal and a New York real estate broker and investment bank, commented this week that commercial real estate loans are a major issue that the market must consider, as a large number of real estate loans will not yield returns when they mature.This is a fact that the bank's balance sheet does not take into account.

According to data from commercial real estate data provider Trepp, by the end of 2025, bank lenders will have a total of approximately $560 billion in commercial real estate debt due, accounting for more than half of the total debt due during the same period. Compared to large banks, regional banks are more vulnerable and will be hit harder because they lack large credit card portfolios or investment banking businesses that can withstand risks.