Troubles at New York Community Bank Drag Down Regional Bank Stocks, But Bonds Remain Steady
The recent troubles facing New York Community Bank (NYCB) have had a significant impact on regional bank stocks, causing them to plummet. However, despite the stock decline, NYCB’s bonds have remained steady, indicating that bondholders view the bank’s issues as isolated.
Last week, NYCB’s sole traded bond experienced a sharp decline as the bank posted an unexpected quarterly loss and revealed problems with its commercial real estate loans. To meet regulatory requirements, the bank also decided to slash its dividend and build up capital. As a result, the stock has dropped nearly 60% year-to-date, and its bonds are currently trading at around 75 cents on the dollar after being downgraded to junk status by Moody’s Investors Service.
D.A. Davidson, an analyst firm, downgraded NYCB’s stock to neutral from buy and stated that it is trading “untethered from fundamentals.” Analyst Peter Winter reduced his price target for the stock to $5 from $8.50 following the downgrade and the bank’s disclosure of increased deposits and plans to hire a new chief risk officer. The departure of both the chief risk officer and main audit executive from NYCB has raised concerns and brought back memories of Silicon Valley Bank’s collapse in March 2023, which occurred when it lacked a chief risk officer during a run on deposits.
In the fourth quarter, NYCB raised its loan-loss reserves by 790%, or $490 million, which was the highest increase among regional banks. However, other banks also made significant hikes in their reserves during this period. Despite these challenges, NYCB’s floating-rate notes that mature in 2028 experienced a slight increase of about 5 basis points on Thursday.
The chart provided by data-solutions provider BondCliQ Media Services illustrates the performance of select community-bank bonds over the past two weeks. NYCB’s bonds have seen the most significant decline, followed by Valley National Bancorp’s 3.0% notes maturing in June 2031, which have fallen to 78 cents on the dollar. Valley National Bancorp, operating as Valley Bank, is a regional lender based in Morristown, N.J., with approximately $61 billion in assets.
Interestingly, while NYCB’s bonds have been selling off, the bonds of other small lenders have remained steady. These include Western Alliance Bancorp, a Phoenix-based lender with $70.9 billion in assets; Zions Bancorp N.A., a Salt Lake City-based bank with $87.2 billion in assets; First National Bank of Pennsylvania, a Pittsburgh-based lender traded as F.N.B. Corp. with $34.74 billion in assets; and Webster Financial Corp., a Stamford, Conn.-based lender with $74.95 billion in assets. These banks’ bonds have even seen net buying over the past two weeks, suggesting that investors do not believe NYCB’s troubles will spread to other institutions.
Market sources indicate that the bond market views NYCB’s problems as isolated and does not anticipate any contagion effect. The SPDR S&P Regional Banking ETF, which tracks the sector, has experienced a 0.3% decline on Thursday and an 11% drop year-to-date. In contrast, the S&P 500 has gained 4.6% during the same period.
Overall, while NYCB’s stock continues to struggle, its bond performance suggests that bondholders perceive the bank’s issues as contained. Other regional banks have managed to maintain stability in their bonds, indicating that investors remain confident in their resilience. The situation at NYCB is being closely monitored, but for now, it appears that the impact is limited to the bank itself.