Street Talk

Rate hikes by the Federal Reserve and changes in post-pandemic behavior have put pressure on commercial real estate (CRE) borrowers needing to refinance loans coming due. The tally is nothing to sneeze at, with approximately $950 billion in CRE mortgages set to mature in 2024, according to S&P Global Market Intelligence's analysis of nationwide property records. In the episode, S&P Global Market Intelligence analysts Tom Mason, Chris Hudgins and Zain Tariq discuss the threat of maturing CRE mortgages and what portion of those loans are in the troubled office sector. The trio also outlined differences in valuations across different CRE categories, the potential read through provided by the publicly traded REIT sector, and how banks are managing their CRE exposures and reacting to regulatory and investor scrutiny into the asset class. 

Bank stocks and regional bank stocks in particular have rallied over the last month and there is further room to run, according to Joe Fenech, Chief Investment Officer at GenOpp Capital Management. In the episode, recorded on July 16, Fenech said that sentiment towards bank stocks is improving and that the long bear market in bank stocks ended in May 2023. The investor argued that the recapitalization of New York Community Bancorp earlier in 2024 could serve as the turning point of this investment cycle now that “smart money” has rescued one of the sector’s biggest problems. He also sees net interest margin pressure easing and eventually becoming a tailwind for banks and argued that not all commercial real estate (CRE) loans should be seen as high risk and resulting in sizable losses. He also believes M&A activity will increase, driven by succession issues and the need for scale and technology investment.

Tales from Top Performers features conversations with executives at high-performing banks about their view of current issues, and the greatest challenges and opportunities they see ahead. This episode features executives from three of the highest performing banks in the country: Curtis Griffith, chairman and CEO of Lubbock, Texas-based South Plains Financial; Paul Egge, CFO of Houston-based Stellar Bancorp; and Skip Hageboeck, CEO of Charleston, W. Va.-based City Holding Co. The bankers outlined how they've been able to maintain strong deposit franchises in the face of fierce competition, their outlook for loan growth and credit quality, and the greatest challenges and opportunities they see over the next year.  

Deposits and liquidity remain at the forefront for most bankers and the intense competition for core funding will eventually lead to a resurgence in M&A activity. That was the message delivered by a variety of presenters at S&P Global Market Intelligence’s annual community bankers conference on May 20 and 21, but they acknowledged that transactions face some challenges in the near term, including lower valuations, fewer would-be buyers and regulatory pressures that tend to require more capital in deals. The episode features commentary from banking experts at Ampersand, Curinos, StoneCastle Partners, Performance Trust Capital Partners, Fenimore Kay Harrison, Stephens, Janney Montgomery Scott, Piper Sandler and Klaros Capital.

The investment community has expressed great concern over commercial real estate and questioned whether a severe downturn could lie on the horizon, but Rich Hill, head of real estate strategy and research at Cohen & Steers, is not in the camp.

In the episode, Hill discussed the misconceptions about commercial real estate, the considerable differences in risk across various subcategories and how publicly traded REITs serve as a leading indicator to the private markets. The veteran of the real estate space further argued that the current cycle is very different than the global financial crisis and could represent the greatest opportunity to invest new capital in a generation.

Tales from Top Performers is a new series under the Street Talk banner that will feature conversations with executives at high-performing banks about their bank and experience in the sector; their view of current issues, and the greatest challenges and opportunities they see ahead. The inaugural episode features a discussion between James Beckwith, CEO of Rancho Cordova, Calif-based Five Star Bancorp, a previous winner of S&P's Global Market Intelligence's annual bank rankings, and S&P co-hosts Nathan Stovall, director of financial institutions research, and Jimmy Pittenger, who oversees the firm's US financial institutions commercial team. In the episode, Beckwith discusses how he got into banking, what he loves about the industry, how his institution has built an attractive deposit franchise and managed elevated exposure to commercial real estate, and his view on the greatest challenges and opportunities ahead. 

The banks that failed in the spring of 2023 were outliers that violated some of the golden rules of banking, but many investors continue to unfairly paint the bank group with a broad brush, according to KBW CEO Tom Michaud. In the episode, Michaud discussed the drivers of the large bank failures in 2023 and the idiosyncrasies of those institutions. He further discussed the regulatory response to the liquidity crunch and criticized the Basel III endgame proposal while advocating for deposit insurance reform. The executive also noted that investors continue to treat all banks the same and express concern over their commercial real estate exposures but noted that most of the industry faces an earnings issue rather than a threat to safety and soundness.

Regulatory scrutiny has intensified in the aftermath of the liquidity crunch that erupted in 2023 and could play an even larger role in bank M&A activity in 2024 by motivating more banks to consider selling, while also standing in the way of some transactions. The episode features views presented by advisers at Hovde Group, KBW and Luse Gorman at the Acquire or Be Acquired conference, commentary from executives at Community Bank System and Columbia Banking System on the current state of bank M&A, and some discussion of the unfolding situation at the New York Community Bancorp.

U.S. banks’ fourth-quarter 2023 earnings demonstrated continued pressure on funding costs and minimal slippage in credit quality. The Street largely took the results in stride, but management teams were hopeful that net interest margin pressure could subside in the second half of 2024 and credit quality would hold up in the face of a higher for longer rate environment, according to Gerard Cassidy, co-head of global financials research at RBC Capital Markets. In the episode, the veteran analyst said he shares that optimistic outlook and believes the current environment is more similar to 1995 when the U.S. economy digested sharp rate hikes by the Federal Reserve and likely will not result in a severe downturn like some investors fear. Cassidy believes bank stocks are a show me story but does see further catalysts on the horizon. The analyst also offered his outlook for bank M&A activity.

The word unprecedented became commonplace in banking circles in 2023. The Federal Reserve’s rate hike campaign pushed bank balance sheets deeply underwater, spurred deposit outflows and exposed asset/liability mismatches at some institutions that culminated in record-breaking bank runs that led to the second, third and fourth largest bank failures in US history. Those closures and the liquidity crunch, regulatory response, market selloff and eventual recovery that followed changed the competitive landscape and the way bank observers view the industry. This episode features commentary from experts at BTIG, Davis Polk, Janney Montgomery Scott, KBW, Luse Gorman, Piper Sandler and others on the lessons learned from the liquidity crunch, the fallout afterward and the potential opportunities that lie ahead.