In short: The new short — the interest-rate hedge for a Fed he now expects to hike. "If they hike, that's going to be very bad for commercial real estate, which is why we were adding a bank short that's the most exposed to commercial real estate in the United States." The transmission: "commercial real estate is not valued on the back end of the curve like mortgage rates for residential are. Commercial real estate is benchmarked off SOFR, which is basically the same as the Fed funds rate." The name: "VLY… is a short target primarily due to its structural exposure to commercial real estate debt… elevated liability costs, very minimal NIM… close to its 52-week highs despite being one of the most exposed banks." The numbers: "a total loan book of about 51 billion… commercial real estate exposure of 30 billion, so almost 60%… non-owner-occupied commercial real estate is about 329% of total risk-based capital" (down from 474%) — and the quality problem: "it sold a lot of its good properties and kept a lot of the bad properties." Plus "non-interest income… accounts for only 13% of its total revenue" and an allowance for credit losses that "has historically trailed" peers (deck: ~1.19% vs 1.4-1.5%). The chart: down 50% to almost $6 by April 2023, now "around 13.80," the highest since 2009. Target: "we think this bank could easily be down 20-30% on an interest rate scare." Why this short and not a crowded one: "the short interest isn't too high, it's around 9%… this is a short that I can put on and not be as scared about… if the short interest was like 15, 20%, I would be more worried." Risks named: CET1 up to 11% and S&P's positive outlook — "but I don't think S&P ever thought that we would be hiking rates again."
Valley National is a regional bank based in New Jersey that lends heavily against commercial property — apartment buildings in the New York area, suburban shopping centres, offices and warehouses. About $30 billion of its $51 billion of loans are commercial real estate, which is more than three times the bank's capital cushion. Regulators treat 300% as a warning level.
Singh is betting its shares fall, and the reason is how commercial property loans are priced. Home mortgages follow long-term bond yields, but commercial property loans float with short-term rates that move almost one-for-one with the Federal Reserve's policy rate. If the Fed raises rates next week, property owners' interest bills rise straight away, more of them struggle to refinance, and banks like Valley have to write down loans. Valley is worse placed than big banks for three reasons: only 13% of its revenue comes from fees, so it has little income that is unaffected by lending; its reserve for bad loans has been smaller than its peers'; and when it cut its property exposure after 2023, it sold the good loans and kept the weaker ones.
Two practical points shape the trade. The shares have rallied to around $13.80, near a five-year high, so a lot of good news is already in the price. And only about 9% of the shares are already sold short, which means there is less risk of a "short squeeze" — a sudden rise as short-sellers rush to buy back. He thinks the stock could fall 20-30% on an interest-rate scare. The risk to the idea is that the bank has genuinely strengthened: its capital ratio is up to 11%, and S&P Global has a positive outlook on it — though Singh notes that outlook was set before anyone expected rates to rise again.
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