U.S. Regional Bank Shares Continue Sell-Off Amid Industry Health Concerns
The sell-off in shares of U.S. regional banks continued on Thursday, causing further losses in the industry. This decline comes after New York Community Bancorp announced a surprise loss and a 70% dividend cut, renewing fears about the health of the industry. The KBW Regional Banking Index fell 1.8%, marking its biggest single-day decline since the collapse of Signature Bank in March last year. New York Community Bancorp was last down 8.4%.
Investor Concerns and Market Reactions
The sell-off has raised concerns among investors about the overall health of the industry. Seth Hickle, a derivatives portfolio manager at Innovative Portfolios, believes that not all regional banks should be unjustly punished. He suggests that after the dust settles and winners emerge, he will reevaluate and look for potential trading opportunities. However, Hickle notes that other investors seem to be avoiding regional banks as well.
Jaap de Vries, a trader at Optiver in Chicago, points out that investor concern over commercial real estate exposure has been reignited after Aozora Bank’s recent results. This fear has translated into increased demand for protection in the SPDR S&P Regional Banking ETF (KRE), with investors showing renewed interest in buying KRE puts expiring in May.
Macrae Sykes, a portfolio manager at Gabelli Funds, explains that New York Community Bancorp’s performance has had a negative impact on other banks. The delay in the Federal Reserve’s easing of rates has also affected overall sentiment in the banking sector. Smaller banks are being impacted by higher deposit costs, and a rate cut from the Fed could potentially help them.
Steve Sosnick, the chief strategist at Interactive Brokers, highlights the shoot-first, ask-questions-later response from investors following last year’s collapse of Signature Bank. He expresses concern that the sell-off is continuing despite a broader market rally, and even big banks are not immune to the decline. However, he believes it is premature to worry too much, as the situation may be more idiosyncratic.
Michael Farr, the chief executive of investment advisory firm Farr, Miller & Washington, shares Sosnick’s sentiment. He does not see a systemic problem but rather considers the current situation to be more idiosyncratic. Farr believes that if the issue becomes more widespread, it could force the Fed’s hand sooner. However, he does not see evidence to support that at the moment.
Michael Reynolds, the vice president of investment strategy at Glenmede, emphasizes the need to closely monitor regional banks. While there is currently no evidence of stress broadening out, he warns that these things can spread quickly, as seen in March last year. Reynolds explains that consumer sentiment plays a significant role in the banking system, as a bad report from one bank can lead consumers to withdraw their deposits.
Positive Outlook for Regional Banks
Despite the sell-off, some experts remain optimistic about the future of regional banks. Matt Pestronk, the co-founder and president of real estate developer Post Brothers, believes that New York Community Bancorp is oversold. He highlights the bank’s low loan losses and its proven history over time. Pestronk suggests that banks are closer to being healthy than they have been, especially with expected rate cuts easing pressure on floating rate loans.
Martin Rauchenwald, a partner and leader of the financial services practice at Arthur D Little, warns that financial institutions need to reassess their portfolios and explore alternative financing options to avoid another crisis. He points out that contractionary monetary policy, economic slowdowns, and a high-interest environment have created real danger for financial institutions.
David Wagner, a portfolio manager at Aptus Capital Advisors, explains that New York Community Bancorp’s decline is primarily due to company-specific reasons. The bank’s acquisition of Signature Bank led to higher capital ratios, resulting in the dividend cut and increased loan loss provision. Wagner believes that this issue is idiosyncratic and not indicative of a systemic problem in the industry.
Conclusion
The sell-off in U.S. regional bank shares has raised concerns about the health of the industry. However, experts have differing opinions on the severity of the situation. While some believe it is a more idiosyncratic issue, others warn of potential risks in the commercial real estate market. It is crucial for investors and financial institutions to closely monitor the situation and reassess their portfolios to mitigate any potential risks.
