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Regional banks aren’t out of the woods yet. Their stocks were hammered recently after news of New York Community Bank's (NYCB) big fourth-quarter loss led the bank’s shares to fall about 60%.
NYCB is unusual in its role as a major lender to rent-stabilized landlords in New York City. Most of its total multifamily loan book is secured by properties in New York state, many of which are subject to rent control. Big drops in the values of office buildings will put pressure on some banks. Expect delinquency rates on commercial mortgage-backed securities to double in 2024.
On a more positive note, deposit outflows from small and midsize banks have slowed. Depositors appear less concerned with losing uninsured money after regulators stepped in early last year to insure all deposits at Silicon Valley Bank and First Republic Bank. Net interest income (NII) — the difference between what banks earn from lending and pay out on deposits — will likely fall for most regional banks this year, as they will have to pay more to depositors. How much depends on how much longer interest rates stay high. Large banks should avoid the stock sell-off because they are more diversified and have set aside greater reserves to cover potential loan losses than smaller banks.
Banks are still tightening lending standards, but at a slower pace, according to the latest survey of senior loan officers. Also, the share of banks that are doing so has fallen considerably after peaking after last spring’s crisis of regional bank failures. A less favorable and uncertain economic outlook, worsening in credit quality of loans, and lower collateral values are among the top cited concerns. Businesses’ demand for credit keeps falling, especially among small firms.
This forecast first appeared in The Kiplinger Letter, which has been running since 1923 and is a collection of concise weekly forecasts on business and economic trends, as well as what to expect from Washington, to help you understand what’s coming up to make the most of your investments and your money. Subscribe to The Kiplinger Letter.
