No Safety Net Is Big Enough for the Entire U.S. Banking Sector

The financial community finally got a snippet of good news...

Last month, New York Community Bancorp (NYCB) – one of the nation's largest regional banks – received a significant capital boost... to the tune of $1 billion.

The bank had been on shaky ground. Its deposits were down roughly 7% from February. It was grappling with the digestion of two recent acquisitions. And its commercial real estate portfolio had become a continued source of stress.

It looked like NYCB could be the next bank to fail...

So, in a rescue mission led by former Treasury Secretary Steven Mnuchin, a group of equity investors stepped in with a billion-dollar cash infusion. Mnuchin – who has now joined NYCB's board along with a few of the group's other investors – said that the lifeline has "strengthened the company's balance sheet and liquidity position."

The move was a surprising glimmer of hope for U.S. regional banks. And the company's bailout hopefully draws a line under the issues at NYCB.

However, it'd be foolish to think that the banking crisis that began a little more than a year ago with the collapse of Silicon Valley Bank ("SVB") is over. And it would be even more foolish to ignore the broader implications for the U.S. credit environment...

This bailout should highlight the problem – not be seen as the solution...

NYCB wasn't part of the string of regional banks that began failing in March 2023. In fact, the bank seemed to be capitalizing on the opportunity... picking up parts of Signature Bank after it was shut down.

However, that growth may have actually exacerbated the company's underlying issues...

NYCB had also acquired mortgage servicer Flagstar Bancorp in 2022, and the rapid growth was beginning to become unsustainable.

These deals pushed NYCB above the $100 billion asset mark, placing the company into a stricter regulatory category much quicker than it was ready for. It had only crossed the $50 billion mark five years prior in 2018.

With tighter regulation came greater reserve requirements... NYCB had to put aside more cash to ensure it could meet its liabilities. And that's despite the greater balance-sheet obligations it took on from Signature Bank.

The timing could not have been worse.

Today, commercial real estate – which NYCB is heavily exposed to – is suffering from record-level delinquency rates. This past January, NYCB announced loan-loss provisions that were 10 times analyst expectations. This coincided with a 70% dividend cut, ringing the warning bell for the bank's shareholders and the sector as a whole.

What resulted was no surprise... NYCB's stock plummeted 38% the day of the announcement – beginning to look like the next banking domino that would fall.

Ironically, NYCB found itself in a similar situation to Signature Bank and SVB, as it was forced to seek equity financing. The move was a desperate call for help – one that, in the case of SVB, had contributed to a major bank run.

Lucky for NYCB, though, a bank run never occurred. Even luckier, it received a bailout.

Unfortunately, this safety net isn't big enough for everyone...

Last month, the Federal Deposit Insurance Corporation ("FDIC") came out with its latest list of "problem banks" in the U.S.

The number of problem banks – those with financial, operational, or managerial weaknesses – rose from 44 in the third quarter of 2023 to 52 at the end of the year.

That's way below the all-time high of 888 seen following the 2008 financial crisis... but it's still concerning that the number jumped 18% in a single quarter. Not to mention, it has been steadily rising since bottoming at 39 in the fourth quarter of 2022.

Now, NYCB wasn't even on the list... yet it still raised enough alarm bells to get bailed out.

And with growing issues from consumer credit, commercial real estate, and corporate credit, those numbers are only likely to worsen from here.

In terms of commercial real estate properties, late payments on properties that aren't owner-occupied are at their highest levels in about a decade.

Consumer credit is following in parallel, with delinquent credit cards at their highest level since 2011.

As regular readers know, credit is the lifeblood of the economy...

And it's tough to have a healthy and growing economy if the credit market is under serious pressure.

As banks face ongoing challenges and work on strengthening their balance sheets, they're likely to limit the amount of money they lend out.

The U.S. economy is already sitting on a mountain of debt. Banks are pulling back on consumer loans, as well as commercial and industrial loans. And their lending standards are still at recession levels, according to the Senior Loan Officer Opinion Survey.

So, despite the market mania we're seeing today, banks' tight lending standards are going to continue to slow economic growth.

If the FDIC's "problem bank" list keeps growing at its current rate, investors will eventually take notice – and finally realize just how risky the market actually is right now.

It's yet another reason to remain cautious of the market's current nosebleed valuations.

Regards,

Rob Spivey
April 1, 2024

Editor's note: With interest rates at record highs and the credit markets only growing tighter... a lot of companies will struggle to access capital in the coming months. That's creating a unique opportunity in one misunderstood corner of the market...

More than two-thirds of publicly listed biotech stocks are down 80% or more. And of those, a very small subset is trading for less than their cash on hand.

We call these "negative-EV companies"... and if this sounds like it shouldn't be possible, you're right. Joel has gone on record saying this is the sort of opportunity you only see once or twice in a lifetime. And he doesn't expect it to last much longer.

Our team dropped everything to dig in to the numbers... and put together a list of our top five "negative-EV" biotechs to buy today, plus another eight we're watching closely. Get the full story right here.