U.S. regional banks experienced another day of significant sell-offs on Thursday, amplifying losses observed just a day earlier when New York Community Bancorp reported challenges within its commercial real estate portfolio, reigniting concerns surrounding the industry’s stability.
The KBW Regional Banking Index declined by 1.6%, marking its largest single-day drop since the collapse of Signature Bank in March 2023.
Shares of NYCB continued their downward trend, shedding an additional 8.5% of their value and trading at $5.92 at the time of reporting, partially recovering from deeper losses earlier in the day. Wednesday saw a record-breaking single-day decline of 37.6% for the stock, as reported by LSEG.
The heightened selling pressure on banking shares has reignited apprehensions regarding regional lenders, although many analysts and investors have indicated that the issues at NYCB are primarily unique to the institution.
“Last year was undoubtedly the year of deposits. No bank wished to encounter deposit outflows. This year, the narrative shifts to credit quality,” remarked Alexander Yokum, senior equity analyst at CFRA Research, underscoring NYCB’s larger exposure to real estate compared to its peers.
Moody’s has placed its ratings on NYCB under review for a possible downgrade into “junk territory,” while Morgan Stanley is reassessing earnings estimates for the bank. Additionally, several banks, including Bank of America and UBS, have lowered target prices for NYCB.
Shares of Western Alliance Bancorp and Valley National Bancorp saw declines of 4.8% and 5% respectively, while Comerica’s shares dropped by 2.1%. The S&P 500 Banks index experienced a downturn of approximately 1.2%.
The decline in U.S. regional bank stocks on Wednesday resulted in short sellers accruing approximately $685 million in paper profits, according to data and analytics company Ortex.
NYCB’s acquisition of Signature Bank and its 2022 purchase of Flagstar Bank propelled its assets beyond the $100 billion regulatory threshold, subjecting it to stricter capital and liquidity requirements.
“We believe NYCB has several idiosyncratic characteristics, but the result and reaction are reminders of risks that remain in the regional banking space,” wrote Jefferies analysts.
NYCB anticipates net interest income (NII) for 2024 to range between $2.8 billion and $2.9 billion, with the midpoint falling below analysts’ expectations of $2.88 billion, according to LSEG data.
JPMorgan analyst Steven Alexopoulos maintained an “overweight” rating on NYCB’s stock, considering it the brokerage’s top pick for 2024.
Investors and analysts note that banks offering higher interest rates on deposits may experience a decline in NII, as highlighted during first-quarter earnings reports where many regional banks mentioned a decrease in NII.
Another potential concern for regional banks is their exposure to the troubled commercial real estate (CRE) sector, which has faced challenges due to elevated borrowing costs and remote working trends.
NYCB’s fourth-quarter loss was driven by a $552 million provision for credit losses, with specific mention of challenges in its CRE portfolio, particularly in office and multifamily property markets.
The stock sell-off on Wednesday suggests that the recovery in the regional bank index may not follow a linear trajectory, according to Rick Meckler, partner at Cherry Lane Investments, who emphasized the need for individual regional banks to demonstrate positive results in a presumed non-recessionary and lower interest rate environment.
In a reflection of global implications, Japan’s Aozora Bank reported its first annual net loss in 15 years, citing significant loan-loss provisions for U.S. commercial property.
