The Brewing Storm in the Banking Sector: Mounting Losses and Turbulence

The Unfolding Crisis

It has been nearly a year since the banking sector was rocked by a crisis that led to the collapse of three US regional lenders and the emergency takeover of Credit Suisse in Europe. Now, a fresh chill is running through banks in New York, Tokyo, and Zurich, signaling mounting losses and turbulence in the banking sector.

A screen displays the trading information for New York Community Bancorp at the New York Stock Exchange on January 31, 2024.

Common to all of them is the mounting losses on lending to the troubled commercial property sector, which has sent shockwaves through the industry. Shares in New York Community Bancorp (NYCB) plunged 38% after reporting a loss of $252 million for the last quarter, setting aside $552 million to absorb loan losses, up from $62 million in the previous quarter. This increase was driven partly by expected losses on a loan used to finance an office building.

The turmoil in the banking sector has been further exacerbated by the sharp decline in shares of NYCB, as well as other regional banks, including Banc of California and BankUnited. The losses incurred by NYCB were tied to office buildings, as CEO Thomas Cangemi referred to 'general office weaknesses throughout the country' in a call with investors.

Global Impact

The impact of the crisis is not limited to the US, as Japans Aozora Bank reported bad loans tied to US offices, partly to blame for its projected annual loss of 28 billion yen ($190 million) last year. This news sent its shares plunging over 21%, indicating the global repercussions of the crisis.

Furthermore, Swiss private bank and wealth manager Julius Baer announced a 55% decline in its adjusted profit last year due to losses on loans made to a single 'European conglomerate.' The departure of its CEO in the wake of the losses further highlights the far-reaching impact of the crisis.

The headquarters of Swiss private bank Julius Baer in Zurich, Switzerland in February 2022.

Germanys biggest lender Deutsche Bank also felt the impact, allocating €123 million ($133 million) during the last quarter to absorb potential defaults on its US commercial real estate loans, more than quadruple the amount set aside during the same period in 2022.

Assessment and Outlook

The recent turbulence in the banking sector has raised concerns among investors and regulators, with a keen focus on the exposure to the ailing commercial real estate market. The value of many buildings has plummeted due to remote working, leaving vast tranches of office space vacant or underused. Additionally, historically high interest rates have made it harder for real estate developers to make good on their repayments, further exacerbating the crisis.

While the KBW Bank Index and Europes benchmark Stoxx Europe 600 Banks index have shown some recovery since hitting a low, concerns linger about the potential contagion and the limited impact on systemically important banks. The assessment of the crisis suggests that while it may not rock big, well-capitalized banks, the small ripples of turmoil and mounting losses in the banking sector warrant close attention.