Banks from Tokyo to NYC feel the pain as US office market takes a hit

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Tokyo’s Aozora Bank and New York Community Bancorp posted massive losses tied to commercial real estate loans Thursday morning, an indication that threats to the office sector aren’t over yet.

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Tokyo-based Aozora Bank’s stock took a beating on Wednesday after the bank revealed it expects to close the fiscal year at a loss due to its ties to United States commercial real estate loans. This came alongside news of New York Community Bancorp shares hitting a 23-year low on Thursday following its own response to weakness in the commercial sector.

Shares of the Japanese bank sank by as much as 21.5 percent to about $17.41 per share, the lowest level recorded for the bank since May 31. The commercial lender says it expects to post a net loss of about $191 million for the fiscal year ending March 31.

“Due to higher U.S. interest rates and a shift to remote work accelerated by COVID-19, the U.S. office market continues to face adverse conditions combined with extremely low liquidity,” the bank said in a statement posted online on Wednesday. “While price discovery is anticipated to eventually improve with a gradual increase in office transactions on the back of an expected return-to-office movement as well as a pause in the rise in U.S. interest rates, our view is that it may take another year or two for the market to stabilize.”

Aozora’s announcement and subsequent stock price plummet came the same day regional bank New York Community Bancorp, which similarly transacts a large number of real estate loans, announced an unexpected net loss of $252 million for the fourth quarter of 2023, and that it intends to slash its dividend and stockpile reserves “to address weakness in the office sector.” NYCB’s stock price dropped 38 percent on Wednesday after news of the losses surfaced in an earnings report.

NYCB had originally played the rescuer in the collapse of Signature Bank, another real estate-focused lender in New York that folded in 2023 over concerns about risks on its balance sheet, paving the way for NYCB to purchase some of its assets.

The bank’s decision to absorb billions of dollars in loans seized from Signature Bank, thus subjecting it to the higher regulatory standards applied to institutions with an asset threshold north of $100 billion, is ultimately the reason it was put in the position to cut its dividend, as larger banks are required to have funds set aside to offset potential losses.

“We took decisive actions to build capital, reinforce our balance sheet, strengthen our risk management processes, and better align ourselves with the relevant bank peers,” NYCB CEO Thomas Cangemi said in a statement released Wednesday.

The losses reported by Aozora and NYCB are illustrative of the coming storm for U.S. lenders, who have been warning of the impending long-term effects of the steep decline in value of commercial real estate post-pandemic amid an ongoing preference shift to remote work and the rise of interest rates. The result for commercial lenders — like Aozora and NYCB — is the expectation that more commercial landlords will default on their loans as they struggle to pay them off amid plummeting building values.

Regional banks like NYCB and Signature Bank are expected to bear the brunt of the commercial loan fallout. Commercial real estate loans account for 28.7 percent of assets at small banks, versus just 6.5 percent at larger national banks, according to a report from JP Morgan Chase.

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