Valley National, Eagle Bancorp latest to disclose earnings hit due to CRE footprint

By Manya Saini and Niket Nishant

(Reuters) -Valley National Bancorp and Eagle Bancorp were the latest regional banks to outline a hit to their earnings from exposure to commercial real estate (CRE) loans, underscoring the uncertainty that has clouded the industry.

High interest rates and borrowing costs have heightened worries of debt defaults in the CRE market, which is already in the doldrums due to empty office buildings in the post-pandemic era, prompting banks to build rainy day funds for potential defaults.

Investor focus this year is on the CRE exposure in regional lenders' loan books after New York Community Bancorp reported a surprise quarterly loss in January due to writedowns on loans tied to the sector.

Eagle's stock hit its lowest in six months before closing down 10% on Thursday, a day after it reported a near six-fold jump in provisions for credit losses that led to a surprise loss for the first quarter.

The bigger provisions were due to weakness in just one office property, however, and it was not indicative of other loans in its office and CRE portfolio, Eagle said.

Analysts at KBW said while the results had "credit noise" due to office exposure, it is encouraged by the bank's high level of capital.

The bank's common equity tier 1 capital to risk-weighted assets ratio - a regular metric used to measure the capital strength of a bank - was 13.8% versus 13.75% a year earlier.

It reported a loss of 1 cent per share for the first quarter, compared with a profit of 78 cents per share a year earlier.

Valley National's provisions for credit losses also surged to $45.3 million from $9.5 million a year earlier. Besides CRE, the bank's commercial and industrial as well as construction loan portfolios drove the increase in provisions.

"We see this as a mixed quarter for the company," J.P. Morgan analyst Steven Alexopoulos wrote in a note.

"With all eyes on credit quality given the company’s concentration in CRE loans, while credit quality remained stable, the increase in reserves implies higher loss content in the portfolio is now being assumed."

Scrutiny of regional banks has increased after the failures of Silicon Valley Bank, Signature Bank and First Republic Bank last year reverberated across the global financial system.

Valley's shares fell nearly 1%. Its net income was 18 cents per share in the three months ended March 31, versus 28 cents a year earlier.

(Reporting by Manya Saini in Bengaluru; Editing by Krishna Chandra Eluri and Deepa Babington)