In the Market-Ratings firms quizzed banks after NYCB, fueling worries

Amalgamated Financial

14/02/2024 11:00

By Paritosh Bansal
       Feb 14 (Reuters) - On Feb. 1 as New York Community
Bancorp  NYCB.N  stock fell amid worries about its real estate
exposure, a regional bank hundreds of miles away got a call from
Moody's. The ratings agency wanted to know if the bank was
seeing any fallout.
    Moody's asked the bank, based in the U.S. south, a series of
questions, ranging from whether its clients were worried and had
withdrawn any deposits to what kind of funding facilities it had
in place for contingencies, the bank's CEO said. 
    The CEO, who requested anonymity to avoid drawing any
attention to his bank, expressed surprise that the agency was
asking them such questions when his bank had not seen any
unusual activity. It was not "grounded in reality," he said.
    The southern regional bank wasn't the only one to receive
such a call. A treasurer at another regional bank said at a
recent gathering of his peers, bankers talked about calls from
ratings agencies, observing how quickly and expansive their
questions had been. 
        Adding to the unease: it was unclear whether these were
fact-finding missions or precursors to ratings decisions, the
treasurer said.
        Reuters could not determine to what extent various
ratings agencies had been calling the banks and why.
        These checks, which have not been previously reported,
underscore how what once was a routine conversation between a
ratings agency and a bank is now fraught, as anxiety around the
sector lingers. 
    The nervousness underscores the predicament facing regional
banks. While many of them have taken steps since the failures of
last March to bolster their balance sheets and funding, they are
struggling to shake off persistent questions about their
long-term prospects.
    As a group their earnings are under pressure as they pay up
for deposits, while they face subdued loan demand and potential
losses, especially in commercial real estate assets. NYCB showed
investors are prone to sell first and ask questions later.
    "Everybody's waking up to the notion that we're just not
that far away from the banking crisis of last year, and the NYCB
news is a stark reminder of all that," said Jason Darby, CFO of
Amalgamated Bank  AMAL.O .
    Moody's, S&P and Fitch declined to comment on any
conversations with issuers. 
    Stuart Plesser, managing director for financial institutions
at S&P Global Ratings, said in an email: "While the situation is
fluid, we continue to monitor the acceleration of weakness in
CRE markets and its impact on banks' asset quality."  
        Christopher Wolfe, head of North American Banks for
Fitch Ratings, wrote in an email, that "banks with less than
$100 billion in assets have higher CRE concentrations than their
larger counterparts and are more vulnerable to more downward
pressure.”
  
    RATINGS SURVEILLANCE 
    The ratings agencies don't have much of a choice, especially
after facing flack for being slow to act in the run-up to the
financial crisis of 2008. And some of the bankers acknowledged
that it is part of their job to run checks when such events
happen.
    Last summer, in a similar move Moody's surveyed 55 banks
about their commercial real estate exposure. The survey found
that "banks face significant challenges to refinance CRE loans
over the next 18 months." The agency also downgraded some banks
in the aftermath of the March crisis. 
    Moody's latest questions to banks could mean that the agency
is revisiting that effort, as NYCB's problems crystallized the
potential impact of banks' exposure to commercial real estate. 
    Depending on what they find, checks from ratings agencies
could help shape their view of the health of the regional
banking sector and lead to further ratings actions. Moody's
downgraded NYCB to junk on Feb. 6.
        
    BETTER OFF
    The regional banking executives said the industry is in a
better position than it was last March. 
    BankUnited  BKU.N  CEO Raj Singh said the situation is also
different than what happened last year. In the case of NYCB,
investors worried about credit quality and capital levels versus
last year when the concerns centered around the ability of banks
to have enough cash to meet withdrawal demands.
    "We haven't gotten a single phone call about liquidity or
any concern from any of our depositors," Singh said. 
    Nevertheless, credit and capital can become a liquidity
issue. 
    Amalgamated's Darby said banks that have been more
forthright in their disclosures will likely fare better.
    "The market just got served up a very significant reminder
that there's still a great deal of pressure on banks," Darby
said. "And that real estate portfolios, in particular, have
potential issues that need to be examined more thoroughly.” 
    

 (Reporting by Paritosh Bansal in NEW YORK;
Editing by Anna Driver)
 ((paritosh.bansal@thomsonreuters.com;))