Trading/Investing Thread - Page 140

Bank OZK had two branches in rural Arkansas when chief executive officer George Gleason bought it in 1979. The Little Rock lender today has billions of dollars in commercial real-estate loans, including for properties in Miami and Manhattan, where it is helping fund the construction of a 1,000-foot-tall office and luxury residential tower on Fifth Avenue.

Regional banks across the country followed a similar playbook, gorging on commercial real-estate loans and related investments in big cities over the past decade.

With the commercial real-estate market now in meltdown, those trillions of dollars in loans and investments are a looming threat for the banking industry—and potentially the broader economy. Banks’ exposure is even bigger than commonly reported. The banks are in danger of setting off a doom-loop scenario where losses on the loans trigger banks to cut lending, which leads to further drops in property prices and yet more losses.

Bank OZK hasn’t pulled back from lending, but it has started to see some signs of market trouble. In January, a developer defaulted on a roughly $60 million loan from Bank OZK after construction costs escalated, the bank said. The loan was considered relatively safe because it was far below the building site’s value of $139 million in 2021. In December, a new appraisal put the property’s value at $100 million.

The bank is effectively stuck with the property. “Buying land in the current unstable environment is not something that a lot of people will do,” Gleason, the CEO, said during an April earnings call. Bank OZK declined to comment.

Today’s troubled market, fueled by rising interest rates and high vacancies, follows years of boom times. Banks roughly doubled their lending to landlords from 2015 to 2022, to $2.2 trillion. Small and medium-size banks originated many of those loans, and all that lending helped push up property prices.

Bank OZK’s success over the years allowed Gleason to build himself a 27,000-square foot French chateau-style mansion in Little Rock, which he filled with a vast collection of European art. “I’ve never said that what we do is risk-less,” Gleason told the Journal in 2019. Still, he added, he considers OZK “probably the most conservative” commercial real-estate lender.

Over the past decade, banks also increased their exposure to commercial real estate in ways that aren’t usually counted in their tallies. They lent to financial companies that make loans to some of those same landlords, and they bought bonds backed by the same types of properties.

That indirect lending—along with foreclosed properties, trading portfolios and other assets linked to commercial properties—brings banks’ total exposure to commercial real estate to $3.6 trillion, according to a Wall Street Journal analysis. That’s equivalent to about 20% of their deposits.

The volume of commercial property sales in July was down 74% from a year earlier, and sales of downtown office buildings hit the lowest level in at least two decades, according to data provider MSCI Real Assets. When deals begin again, they will be at far lower prices, which will shock banks, said Michael Comparato, head of commercial real estate at Benefit Street Partners, a debt-focused asset manager. “It’s going to be really nasty,” he said.

Lending is the lifeblood of all real estate, and regional and community banks have long dominated commercial real-estate lending. Their importance grew after the 2008 financial crisis, when the country’s biggest banks reduced their exposure to the sector under scrutiny from regulators. Low interest rates made higher-yielding real-estate loans lucrative to hold.

That strategy now appears risky after the Federal Reserve raised interest rates. Banks are under pressure to pay depositors more to keep customers from fleeing to higher-yielding investment alternatives. Without cheap deposits, banks have less money to lend and to absorb losses from loans that go bad. Depositors withdrew funds from many small and regional lenders earlier this year after the collapse of three midsize banks stoked fears of a systemwide crisis.

The doom-loop scenario is starting to play out in big cities where office vacancies have soared. Real-estate investors that are unable to refinance their debt, or can only do it at high rates, are defaulting. The lenders, no longer getting the debt payments, often have to write down the value of those mortgages. Sometimes the bank ends up owning the property.

“The plumbing is clogged right now,” said Scott Rechler, chief executive of real-estate investor RXR Realty. “And that is going to create a backup that will eventually overflow on the commercial real-estate markets and on the banking system.”

When Rechler asks banks to refinance his office loans now, few respond. In some cases, he said, it’s not even worth trying. Rechler had a $240 million mortgage coming due on a 33-story office building in lower Manhattan. Vacancies were high, renovating or converting the building would be expensive and the cost of a new mortgage was way up. He ran the numbers and decided to default on the loan. RXR said that it’s been working with the lender to market the building for sale to repay the loan at a discount, and that they have discussed possible loan modifications if the building isn’t sold.

Besides banks, lenders such as private debt funds, mortgage REITs and bond investors can also provide funding—but many of them are financed by banks and can’t get loans. “We are seeing a serious credit crunch developing,” said Ran Eliasaf, managing partner of Northwind Group, a private real-estate lender.

Earlier this year, Buffalo, N.Y., regional lender M&T Bank reported nearly 20% of loans to office landlords were at higher risk of default. The bank has reduced commercial estate lending by 5%.

At the end of June, the bank wrote off $127 million worth of loans for three offices and a healthcare facility in New York City and Washington, D.C., according to the company. It also has unrealized losses on $2.5 billion worth of securities that are tied to loans for offices, apartments and other commercial properties, according to the Journal’s analysis. M&T declined to comment.

Darren King, who oversees retail and business banking at M&T, said at a June investor conference that the bank’s commercial-real estate losses would be a slow grind. “It won’t be Armageddon all in one quarter,” he said.

For its analysis, the Journal tallied hundreds of billions of dollars worth of indirect lending, which often isn’t clearly disclosed, by analyzing banks’ reports filed with the Federal Deposit Insurance Corp. and tapping former bank examiners for their knowledge of bank lending practices.

Between 2015 and 2022, banks more than doubled their indirect real-estate exposure. That included loans to nonbank mortgage companies and to real-estate investment trusts that own and operate buildings and lend to landlords. It also included investments in bonds known as commercial mortgage-backed securities, or CMBS. Banks boosted lending to small businesses that used property as collateral as well.

Holdings of CMBS and loans to mortgage REITs and other nonbank lenders accounted for about 18% of the nearly $3.6 trillion in commercial real-estate exposure in 2022, or nearly $623 billion, according to the Journal’s analysis.

The first quarter of 2023 marked the first decline in banks’ commercial real-estate holdings since 2013, according to the Journal’s analysis. At that point, banks’ overall securities holdings had lost nearly $400 billion in value, largely due to higher interest rates. Banks don’t have to mark down the value of loans in most cases, so the real losses are likely greater.

Banks with less than $250 billion in assets held about three-quarters of all commercial real-estate loans as of the second quarter of 2023, the Journal’s analysis shows. They accounted for nearly $758 billion of commercial real-estate lending since 2015, or about 74% of the total increase during that period.

That increase in lending helped boost commercial real-estate prices by 43% from 2015 to 2022, according to real-estate firm Green Street.

Banks and real-estate developers could be relieved from a downward spiral by lower interest rates or by investors stepping up to buy distressed properties. Wall Street firms are raising funds to scoop up properties, but many properties will likely be sold at well below their recent prices, potentially triggering losses for owners and lenders. Roughly $900 billion worth of real-estate loans and securities, most with rates far lower than today’s, need to be paid off or refinanced by the end of 2024.

The Chinese trust sector has once again set off alarm bells with the announcement that Zhongzhi Enterprise Group is declaring itself “severely insolvent.” The Beijing-based conglomerate has reported that it faces a shortfall of 260 billion yuan, the equivalent of $36 billion, and has warned of the risk that this poses to normal operations.

Zhongzhi is one of China’s largest shadow banks, private groups that provide financing through non-traditional institutions, such as trust firms and wealth management funds. Zhongzhi invests much of its investors’ money in real estate projects. The group’s situation, which has gotten gradually worse since the summer, once again underscores the liquidity problems in the Asian giant’s shadow banking sector, which is worth an estimated $2.9 trillion.

Late on Wednesday, Zhongzhi acknowledged in a letter addressed to its investors and seen by the South China Morning Post that its total liabilities were up to 460 billion yuan ($65 billion), against assets of 200 billion yuan. At its peak, this wealth management firm was handling more than one trillion yuan in assets.

The company said in its letter that its assets are concentrated in debt and equity investments and, because they have a long duration, collection is difficult, the expected recoverable amount is low, liquidity is exhausted, and asset impairment is serious.

Zhongzhi attributed the huge deficit to the “internal management [of the firm],” which is now “largely out of control” following the departure of key executives after the death in December 2021 of Xie Zhikun, the company’s founder, who played a fundamental role in the group’s decision-making. “A series of attempts have been made to bail the troubled company out, but they all fell short of expectations. We sincerely apologise to all the investors,” said the letter.

Formal complaints

The first signs of Zhongzhi’s weakness emerged in August, when its investment subsidiary, Zhongrong International Trust, defaulted on a series of high-yield investment products. That default fueled concerns about possible contagion to the Chinese real estate sector, which represents approximately a quarter of the country’s economy. On Thursday, numerous retail investors in the company filed formal complaints with the authorities in Beijing, according to the Financial Times.

“The finance sector’s fortunes are closely related to the property sector due to the big developers’ high gearing ratio,” said Ding Haifeng, a consultant at the financial advisory firm Integrity, in statements to the South China Morning Post.

The Zhongzhi financial crisis adds to the instability in the Chinese real estate market. The storm broke out in 2020, when the government approved a series of restrictions to control debt levels in the sector. But the defaults that have occurred since 2021 by key developers (such as Evergrande and Country Garden) have hampered the growth of the second largest economy on the planet and have shaken global markets.

On January 28 2024 20:10 SC-Shield wrote:
I neither own NVIDIA stocks nor I'm shorting it, just expressing an opinion. I'm absolutely amazed why NVIDIA has 1.5 trillion stock market valuation with just providing video cards. On the other hand, Amazon has 1.64 trillion valuation with frequently visited retail business and cloud. Then, we have Google at 1.92 trillion valuation with Google Pay (Android), Google Search, YouTube and other ad-related business. It just seems difference isn't that high for "just providing video cards", so it seems like 1) a lot of hope was priced into NVIDIA's stock and 2) high demand caused this. Ultimately, once there is more competition, I expect NVIDIA to start to earn less. E.g. if companies start to manufacture their own chips via TSMC/Samsung or if AMD brings something competitive enough.

Of course, this is not advice. NVIDIA may or may not continue for several more weeks, months or years at this pace. It just seems there is a bit too much optimism in its stock price right now.

On January 28 2024 20:23 RenSC2 wrote:

NVDA does have a pretty high PE ratio at 80.62. Of course, AMZN has a PE at 83.31, so even worse. Amazon does seem to be taking over new marketspaces all the time, so continued future growth seems more justified than NVDA to me. However, graphics cards are huge in AI and there is probably a lot of potential for growth within NVDA's core business. So they don't really need to branch out like AMZN does to keep growing. The market may simply demand more of what they're already selling.

Both are quite a bit out of line with major tech stocks like GOOGL (PE 29.15), META (PE 34.85), AAPL (PE 31.34), and MSFT (PE 39.22). So the market must be assuming AMZN and NVDA are more likely to grow than those other ones. I can't really say why the market thinks that other than vaguely "AI" and watching AMZN take over everything.

I think your hypothesis on NVDA seems reasonable, but the market can be quite unreasonable for quite a long time.

Chinese property developer Evergrande faces imminent liquidation after its overseas creditors failed to reach an 11th-hour deal this weekend to restructure the sprawling real-estate company, according to people familiar with the matter.

Talks between the company and its top creditors kicked off last week over a new plan that would have allowed the company to continue its operations, the people familiar said.

Without a deal, a group of Evergrande’s creditors’ plan to support an existing petition to liquidate the company at a winding-up hearing on Monday in Hong Kong, the people familiar said.

Evergrande’s liquidation is likely to send another shock wave through the Chinese real-estate industry that already has seen dozens of developers collapse over the past two years as banks pulled back funding and property values underwent a sharp correction.

Saddled with some $300 billion in liabilities, Evergrande stopped paying its debts over two years ago and has been negotiating a restructuring with its creditors ever since.

The real estate giant faced a Monday deadline to come up with a comprehensive plan to restructure the company’s billions in defaulted debt or face a court order that would give creditors control over Evergrande’s parent company and allow them to liquidate all of its businesses. The group of Evergrande’s creditors plan to support an existing petition to liquidate the company at the winding-up hearing, the people familiar with the matter said.

If the judge approves the petition, then the court will appoint a liquidator for Evergrande’s parent company. The liquidator will be empowered to take over all of Evergrande’s subsidiaries around the world, including in China, and sell the company’s assets to repay its debt.

Already, much of Evergrande’s assets have been sold, seized by creditors, or frozen by Chinese courts. The developer’s dollar bonds were bid below 2 cents on the dollar on Friday.

One unresolved issue would be the reach of the Hong Kong liquidator’s legal power in mainland China. Courts in China have recently started to recognize the legal authority of liquidators from jurisdictions like Hong Kong, where Evergrande’s parent company is listed. In 2022, a Shenzhen court recognized a Hong Kong court-appointed liquidator’s authority in the reorganization of Samson Paper.

Evergrande’s winding-up hearing has been pushed back multiple times since Top Shine Global, one of Evergrande’s offshore creditors, filed a petition to liquidate the company in June 2022. Chinese regulators blocked an earlier restructuring deal after they barred Evergrande from issuing new securities, which was a key feature of the plan.

Evergrande’s default was a watershed moment for the Chinese real-estate industry and fueled a liquidity crisis in the sector. Since then, more than 50 developers have defaulted on their debts, and thousands of people in the sector have lost their jobs.

Sunac China, another large developer that defaulted on its debt, wrapped up its restructuring late last year, providing a road map for peers. Sunac received approval from investors holding 98.3% of its foreign bonds.

The crisis has dealt a blow to China’s economy. The real-estate sector and related industries used to be a major driver for the country’s economic growth and contributed to around a quarter of its gross domestic product. The industry is now dragging down the economy and China’s real estate slump looks set to drag on for years.

New data on the sector’s 2023 performance showed a desperate picture, and economists say the downturn—now in its fourth year—is about to get worse.

Sales of newly built homes in China fell 6% last year, returning to a level not seen since 2016, according to China’s statistics bureau. Prices are also falling, even in the country’s wealthiest cities. Chinese local governments have lost a major source of revenue as land sales plummeted.

On January 29 2024 10:52 {CC}StealthBlue wrote:
Evergrande seems to be on the verge of liquidation as foreign creditors refuse to continue offer continued credit lines. Again this will make Lehman Bros look like a local bank collapsed in comparison. Unless the CCP bails them out.



Source

On January 30 2024 07:23 Jealous wrote:
I've had money in the market through a broker for nearly 15 years now and while the conservative package has beaten inflation over that period, I'm at a point where I am scared to invest more. I know that the line goes up long-term, but it feels like there is a major bubble right now a la late 00s/occupy movement. Does anyone else feel this way? Am I wrong/paranoid in being so pessimistic about the market as it is right now?

New York Community Bancorp Inc.’s stock lost more ground Thursday as it absorbed analyst downgrades and investors shrugged off a stronger-than-expected net interest income forecast from the lender.

New York Community Bancorp’s NYCB stock sank 13.2% in morning trading Thursday, to put it on track for the lowest close since July 2000.

On Wednesday, the bank said it posted a surprise loss and cut its dividend, sending the shares down by 37% in the largest one-day drop in its history.

After the close of trading on Wednesday, New York Community Bancorp said it expects 2024 net interest income of $2.8 billion to $2.9 billion, which is ahead of the FactSet consensus estimate of $2.76 billion.

Net interest income reflects a bank’s profit from loans minus money it pays out in the form of interest for savings accounts.

Crunching the new numbers, Wedbush analyst David J. Chiaverini reiterated his underperform rating on New York Community Bancorp but said its new net interest income outlook is above his prior forecast of $2.7 billion.

Wedbush raised its 2024 earnings-per-share estimate for New York Community Bancorp to 80 cents a share from 65 cents a share, “owing mainly to higher average earning asset and net interest income assumptions following the company’s guidance update.”

Wedbush’s underperform rating on New York Community Bancorp is based on the bank’s above-average commercial-real-estate exposure and the risk posed as these loans mature or reset/reprice at higher rates, he said.

Jefferies analyst Casey Haire downgraded New York Community Bancorp to hold from buy and cut the bank’s price target to $6 a share from $13 on the bank’s unexpectedly fast Category IV bank compliance.

He cut his 2024 profit estimates for the bank by about 30%.

“NYCB’s actions taken thus far are a solid step forward, but impair profitability significantly given a need to run with higher capital/liquidity/reserves while trailing Cat IV peers modestly,” Haire said. “We expect the path to improved profitability will take years while credit risk remains an overhang.”

Raymond James analyst Steve Moss downgraded New York Community Bancorp to market perform from strong buy because its outlook changed unexpectedly.

“The announced repositioning significantly reduces the benefit of acquiring Signature Bank from the FDIC and highlights that regulatory rules for crossing $100 billion in assets is considerably more punitive especially given the dividend cut and level of reserve build that occurred this quarter,” Moss said.

Along with its net interest income projection, New York Community Bancorp said it expects net interest margin of 2.4% to 2.5%, below the analyst estimate of 2.55%. However, its outlook includes actions to increase its balance sheet liquidity and regulatory compliance.

It’s also projecting loans to drop by 3% to 5% in 2024, while its deposits are expected to increase by 3% to 5%.

The bank expects cash and securities to increase by $7.5 billion on a combined basis in 2024.

Moody’s Investors Service has placed all long-term and short-term ratings and assessments of New York Community Bancorp Inc. and its Flagstar Bank NA unit on review for a downgrade from its current rating of stable, the ratings agency said late Wednesday.

Moody’s cited the bank’s “unanticipated loss content in its New York office and multifamily properties, weak earnings, material decline in its capitalization and high and growing reliance on wholesale funding.”

While the bank’s acquisition of selected assets of Signature Bank improved its capitalization and funding profile, the same metrics deteriorated to pre-acquisition levels as of Dec. 31, partly because the bank now must meet Category IV regulatory requirements of being a bigger bank with $100 billion to $250 billion of assets, Moody’s said.

“Moody’s expects capitalization and funding to remain under pressure,” Moody’s said.

On January 30 2024 13:05 KwarK wrote:

Everyone always feels that way. That’s the thing, you can’t act on that feeling because you just don’t know. I lost six figures in 2022 and for most of 2023 I figured line wouldn’t recover, war, political instability, inflation etc. made me a scared investor. I increased cash rather than buying more investments outside of retirement savings. And then Q4 2023 out of the blue it reverses all of the 2022 losses and more. Now if I want to invest that cash I have to buy at a higher price than was available to me when I was scared.

Fortunately it’s not so much cash in the grand scheme of things and I was considering purchasing a house so I wanted it on hand but it’s less than optimal.

You might very well be right but unless you have a crystal ball it doesn’t matter. You can’t act on it. Had I not kept buying through my retirement accounts and remained exposed on my existing investments I’d have missed the Q4 surge.

On February 03 2024 06:26 SC-Shield wrote:


Well, from my limited knowledge of investing, Charlie Munger once said that if you go with the crowd you end up with average results. So if you want to do better, you need to be right and not following the crowd. I also missed great discounts from 2022, I sold Microsoft and Apple shares when I should have held them as they were at pretty good discount compared to late 2023 valuations. Either way, I'm currently holding some quality stocks despite them not being as efficient as 2022 valuations, but I know they'll do well in long term.

On February 03 2024 07:30 KwarK wrote:

Well yeah, obviously if you know they’ll do well (better than a diversified index) long term then hold those ones. I just didn’t realize you knew. I assumed you were forecasting or hoping or guessing. But if you know which stocks will outperform the market then that’s different. Definitely buy the ones you know will win.