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Distressed U.S. Commercial Real Estate Loans Cause Concern for Banks

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New York Community Bancorp (NYCB) isn’t the only bank sounding the alarm about the state of U.S. commercial real estate loans. Japan has also issued a warning, adding to fears in the market.

NYCB experienced its largest one-day drop in history on Wednesday, with shares plunging by 38%. The bank reported an unexpected loss and wrote down bad loans tied to the real estate sector. Credit rating agency Moody’s has subsequently placed the bank’s credit rating under review for a potential downgrade.

Meanwhile, another warning has come from Japan regarding U.S. office loans. Aozora Bank, a Japanese financial institution, anticipates incurring a net loss for the fiscal year due to higher provisions for these loans. The bank made a significant revision to its forecasts, changing from a projected profit of 24 billion yen ($190.5 million) to an expected loss of 28 billion yen. Consequently, Aozora Bank’s stock saw a sharp decline of 21% on Thursday.

A statement released by Aozora Bank attributed the poor outlook for U.S. office loans to several factors. These include higher U.S. interest rates and the accelerated shift towards remote working caused by the ongoing Covid-19 pandemic. The bank expressed concerns about the adverse conditions and extremely low liquidity faced by the U.S. office market. It also anticipated that it may take one to two years for the market to stabilize.

Moreover, Aozora Bank foresees a loss of 41 billion yen in its securities portfolio during the second half of the fiscal year, ending on March 31. This loss is primarily due to foreign bonds and once again linked to high U.S. interest rates.

The news of NYCB’s decision to reduce its dividend and increase its loan-loss reserves by $500 million had a ripple effect across the sector, causing concern among investors. As a result, the KBW Regional Banking Index experienced a 6% decline on Wednesday. Other regional banks, including Zions Bancorp, Western Alliance, M&T Bank, and Eagle Bancorp, also saw declines in their stock prices (ranging from 4% to 10%).

On a slightly brighter note, NYCB, which acquired Signature Bank during last year’s regional bank crisis, saw a modest increase in early premarket trading on Thursday.

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