U.S. Regional Banks Continue to Sell-Off Amid Health Concerns
The sell-off in shares of U.S. regional banks continued on Thursday, causing further losses in the industry. This comes after New York Community Bancorp reported a surprise loss and a 70% dividend cut, renewing fears about the health of the sector. 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 hit particularly hard, with its stock down 8.4%.
Investor Concerns and Market Reactions
Analysts and traders have been closely monitoring the situation, trying to make sense of the sell-off and its implications for the industry. Seth Hickle, a derivatives portfolio manager at Innovative Portfolios, believes that not all regional banks should be unjustly punished. He plans to reevaluate the situation once the winners emerge. However, he notes that options activity suggests others are also avoiding exposure to regional banks.
Jaap de Vries, a trader at Optiver in Chicago, points out that investor concern over commercial real estate exposure has resurfaced after Aozora Bank’s recent results. He highlights increased demand for protection in the SPDR S&P Regional Banking ETF, with investors showing interest in buying put options expiring in May.
Macrae Sykes, a portfolio manager at Gabelli Funds, explains that New York Community Bancorp’s struggles have had a negative impact on other banks. He also mentions that Federal Reserve Chair Jerome Powell’s statement indicating no rate cuts in March contributed to the sell-off. Smaller regional banks were hoping for rate cuts to help with higher deposit costs.
Steve Sosnick, Chief Strategist at Interactive Brokers, notes that the shoot-first, ask-questions-later response from last year’s collapse of Signature Bank seems to be persisting. He expresses concern that the sell-off is continuing despite a broader market rally. Sosnick also finds it interesting that even big banks were not immune to the downturn.
Assessing the Situation
Michael Farr, Chief Executive of investment advisory firm Farr, Miller & Washington, believes that the current issues are more idiosyncratic and not indicative of a systemic problem. He suggests that the market may be too quick to ring alarm bells. Farr points out that if reserves were being added for non-performing real estate loans, it would be cause for concern, but he does not see evidence of that yet.
Michael Reynolds, Vice President of Investment Strategy at Glenmede, emphasizes the need to closely monitor regional banks for signs of stress spreading. He notes that consumer sentiment plays a significant role in the banking system and can lead to deposit withdrawals, which would further impact the banks.
Matt Pestronk, Co-founder and President of real estate developer Post Brothers, believes that the sell-off has oversold regional banks. He highlights their proven history of low loan losses and suggests that banks are closer to health than they have been. Pestronk expects rates to come down, easing pressure on floating rate loans and borrowers, ultimately reducing loan losses.
Martin Rauchenwald, Partner and Leader of the Financial Services Practice at Arthur D Little, warns that contractionary monetary policy, economic slowdowns, and a high-interest environment pose a real danger to financial institutions. He urges banks to reassess their portfolios and explore alternative financing options to avoid another crisis.
David Wagner, Portfolio Manager at Aptus Capital Advisors, explains that the decline in New York Community Bancorp’s stock is due to company-specific reasons. The acquisition of Signature Bank increased capital ratios and led to a dividend cut and a significant increase in the loan loss provision. Wagner believes this is an idiosyncratic issue and not indicative of a systemic problem.
Conclusion
The sell-off in U.S. regional banks has raised concerns about the health of the industry. While some analysts believe that not all regional banks should be punished, others point to renewed investor concerns over commercial real estate exposure. The market’s reaction seems to be influenced by factors such as Federal Reserve statements, company-specific issues, and overall sentiment. It remains to be seen how regional banks will navigate these challenges and whether the sell-off will continue or stabilize in the coming days.
