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Last year was great for big American banks. 2025 looks poised to be even better. But investors’ renewed love for mega-lenders like JPMorgan and Wells Fargo has not been extended to their smaller cousins.
The KBW Regional Banking Index, which includes lenders such as Bank OZK and Bank of Hawaii, is up just 16 per cent over the past 12 months, compared with the 45 per cent gain for the index that tracks larger banks and the S&P 500’s 25 per cent rise.
Some of this is post-traumatic stress. Two years ago, the collapse of Silicon Valley Bank and two other lenders roiled the markets. Attention turned to unrealised losses from bond holdings at smaller US lenders, and their exposure to the troubled $6tn commercial real estate (CRE) market.
Interest rate moves cloud the picture further. While the Federal Reserve’s three cuts since September have stabilised funding costs, longer-dated Treasury yields are still high by historic standards. The rate on 10-year notes is getting close to 5 per cent.
That’s bad news for the CRE market. Property values have already been hit by the downturn in demand for office space, and high rates make it more expensive for borrowers to refinance. Many five-year commercial “balloon” mortgages — those with a lump-sum payment at the end — were written in a lower-rate environment.
Property strains will hit regional and community banks particularly hard because they account for the bulk of CRE bank lending in the US. Moody’s said 27 of the US regional and community banks it rates held CRE loans which were double the size of their tangible common equity as of 30 June.
Flagstar Financial and Valley National Bancorp — two banks whose real estate loan exposure has weighed heavily on their share prices — underscore how tough navigating these headwinds can be.
Charges for bad commercial real estate debt pushed Flagstar — formerly known as New York Community Bancorp — into a $930mn net loss in the first nine months of 2024. At Valley Bancorp, full year net income fell by nearly a quarter in 2024 as credit charges related to its CRE loans swelled.
Banks have been trying to defer the problem by extending or tweaking loan terms. Moody’s reckons banks with less than $100bn of assets modified 0.3 per cent of their CRE loans as of end of the third quarter in 2024, up from 0.1 per cent in the first half.
Of course, the diverging fortunes of big and small banks could be an opportunity in disguise. As animal spirits return, larger lenders’ thoughts may turn to consolidation — and the struggling regional bank sector offers some cheap eats. Time hasn’t fixed their balance sheet problems, but a new wave of M&A might.
pan.yuk@ft.com
https://www.ft.com/content/1f0b2ba2-8e56-485b-8b3c-f8f1babc34f4
