☀️☕️ Real Estate Delinquents!

📊 Also: NVDA tops TSLA; WalMart record high; China record rate cut, markets meh; Bayer Dividend Slashed 95% 🎓 When Good Loans Go Bad

📈 Market Roundup [21-Feb-24]

US large-cap S&P 500 closed 0.6% DOWN 🔻

Tech-heavy Nasdaq Composite closed 0.92% DOWN 🔻

Pan European STOXX Europe 600 closed 0.1% DOWN 🔻

HK/China's Hang Seng Index closed 0.57% UP ▲

Japan's broad TOPIX closed 0.28% DOWN 🔻

📝 Focus

  • Real Estate Delinquents!

📊 In the Markets

  • NVDA tops TSLA; WalMart record high; China record rate cut, markets meh; 

  • Bayer Dividend Slashed 95%

📖 MoneyFitt Explains

  • 🎓 When Good Loans Go Bad

💸 Personal Finance Corner

📝 Focus

Real Estate Delinquents! 

Bad commercial real estate (CRE) loans have shot up to exceed the loan loss reserves🎓 for the sector at 6 major US banks due to a significant rise in late payments associated with offices, malls and other properties.

The reserves for JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs, and Morgan Stanley dropped from $1.60 to just 90 cents for every $1 of delinquent commercial real estate debt, according to FDIC filings. Delinquent commercial property debt for these banks nearly tripled to $9.3 billion last year. (Nationally, CRE delinquencies more than doubled to $24.3bn.)

Basically, the geniuses at those big banks have done a worse job than the overall US banking sector, where there are still $1.40 in reserves for every dollar of delinquent CRE loans (substantially weaker than $2.20 per $1 a year ago.) This calls into question not only their CRE lending practices but also their ability to provision appropriately, particularly with CRE loan losses expected by CBRE to top $60bn over the next five years. 

They’re all WFH - Image credit: Sergei Wing via Unsplash

..... ▷ The commercial real estate sector globally faces intense pressure due to rising interest rates [IMF.]

In the US, the largest market, prices dropped by 11% since the Fed began hiking rates in March 2022, reversing two years of gains. 

Higher borrowing costs directly increase investment expenses and indirectly slow economic activity, reducing demand for commercial properties. 

..... ▷ The current collapse actually contrasts with past Fed rate hikes when prices remained stable or saw milder losses. 

This divergence is probably down to the sharp pace of monetary tightening, leading to higher mortgage rates and reduced private equity fundraising, an important funding source in recent years. 

..... ▷ Pandemic-induced trends like teleworking and e-commerce further dampen demand for office and retail space, increasing vacancy rates and delinquencies on loans.

Challenges are compounded as $1.2 trillion of commercial debt matures in the next two years, with smaller and regional banks facing greater vulnerability due to their five times greater relative exposure to the CRE sector. [MFM: US Offices, Banks and a Tail Risk]

They’re all using eCommerce - Image credit: Igor Karimov via Unsplash

📊 In the Markets

Stocks ended lower in the US on the first day of trading after the Presidents’ Day long weekend, with Nasdaq seeing the largest declines as chipmaker Nvidia stumbled before its earnings report. 

Nvidia fell 4.35%, its biggest drop since Oct. 17, dragging down the broader semiconductor index by 1.56%. Investors are wary if Nvidia's results will justify its high valuation and sustain the AI stock frenzy. 

Nvidia has overtaken Tesla as Wall Street's most traded stock by dollar value, reflecting its status as the third-most valuable US company. With its quarterly report due on Wednesday, investors worry that anything less than a massive blowout could reverse Nvidia's 40% surge in 2024. The heightened trading in AI-related stocks indicates momentum-driven buying, potentially overshadowing fundamentals.

Super Micro Computer, another AI beneficiary, dropped 1.96% after its spectacular recent surge ended with a sudden 20% collapse last Friday. 

Meanwhile, Walmart traded up 6.5% to close at a record high after reporting strong fourth-quarter results, buoyed by demand from inflation-squeezed consumers from all income levels. The retail giant projected strong 2025 sales and increased its dividend by 9%, the largest hike in over a decade. 

Walmart's relatively larger exposure to groceries, where its scale gives it super competitive prices, has shielded it from discretionary spending declines in general.

Backwards! Prices in some categories like apparel are lower than two years ago - Image credit: Tenor

European stocks closed slightly lower on Tuesday as mixed corporate results and a shaky economic outlook in China weighed on investor sentiment, particularly in mining stocks, which led to the decline. 

Eurozone government bonds rallied after data showed slowing collective wage growth, prompting traders to increase bets on ECB interest rate cuts. Yields on 10-year German Bunds fell by 0.04 percentage points to 2.37%.

Asia-Pacific markets closed mixed on Tuesday, with The People’s Bank of China cutting its five-year loan prime rate by 25 basis points (meaning: 0.25%) to 3.95%. This is the largest cut of the benchmark interest rate since it was introduced in 2019 and greater than the 10 basis point cut expected by Shanghai’s Finest. The one-year rate, the benchmark for business loans, was unchanged at 3.45%. 

The five-year rate is the benchmark for most mortgages as well as household and corporate loans, showing targeted support by the PBOC for the country’s struggling property sector.

And yet China’s onshore CSI 300 rose just 0.21%, while Hong Kong’s Hang Seng gained 0.28%

Meanwhile, following the PBOC cut, China’s state-owned banks intervened to support the yuan after the rate cut, selling US dollars to stabilise the currency.

Bayer Dividend slashed 95%

Beleaguered German chemicals conglomerate Bayer will cut its dividend by 95%, paying just €0.11 per share for 2023, down from €2.40 in 2022, as it grapples with its almost entirely self-inflicted injuries from the disastrous acquisition of lawsuit-laden US agrochemical giant Monsanto. 

Frankfurt’s Finest had confidently expected a more modest reduction to €1.92 per share. Bayer plans to maintain minimal dividends for 2024 and 2025, aiming to pay only the legally required minimum. 

A ruling at the end of January added $2.25bn to the $9.6bn it’s paid out so far to those harmed by its glyphosate-based weedkiller products such as Roundup, with tens of thousands more claims still pending. 

Bayer’s entire market value is now $30bn after dropping 16% in 2024 and 80% from its peak in 2015. Bayer acquired Monsanto in 2018 for $63.5bn. [See MFM: Baying for Bayer; Bayer Bayoneted - again]

📖 MoneyFitt Explains

🎓 Bad Loans - Losses, Reserves and Provisions

Loan loss provisions are funds set aside by banks to cover potential losses from loans that may not be repaid. 

These provisions are based on estimates of future loan losses and are recorded as expenses on the income statement, reducing the bank's net income. 

Loan loss reserves, on the other hand, are the actual funds held by the bank to cover these potential losses and are recorded as liabilities on the balance sheet. 

(Changes in both provisions and reserves indirectly affect cash flow by influencing funds available for lending or other activities.)

When loans turn non-performing, or bad, meaning borrowers fail to make payments as agreed, it impacts the bank's income and balance sheet differently depending on the scale. 

For a small amount of non-performing loans, the bank can cover the losses with its existing reserves, impacting profitability but not significantly affecting overall financial health. 

However, if a large amount of loans turn non-performing, it can deplete the reserves, leading to higher provisions, reduced profitability, and potential liquidity and solvency issues, adversely impacting the bank's financial stability.

💸 Personal Finance Corner

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