U.S. Regional Banks Face Sell-Off Amid Industry Concerns
The U.S. regional banking sector experienced a sell-off in shares on Thursday, following losses from the previous day. The sell-off was triggered by a surprise loss and a 70% dividend cut from New York Community Bancorp, which raised concerns about the overall health of the industry. The KBW Regional Banking Index saw a decline of 1.8%, marking its largest single-day drop since the collapse of Signature Bank in March of the previous year. New York Community Bancorp shares were down 8.4%.
Industry experts have weighed in on the situation, offering their insights and analysis. 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 dust settles and winners emerge. Hickle also noted that options activity suggests others are avoiding exposure to regional banks.
Jaap de Vries, a trader at Optiver in Chicago, highlighted renewed investor concern over commercial real estate exposure following Aozora Bank’s recent results. He mentioned that demand for protection is increasing in the SPDR S&P Regional Banking ETF, with investors showing interest in buying put options.
Macrae Sykes, a portfolio manager at Gabelli Funds, explained that New York Community Bancorp’s performance has had an impact on other banks. He also noted that Federal Reserve Chair Jerome Powell’s statement about no rate cuts in March affected sentiment in smaller regional banks.
Steve Sosnick, the chief strategist at Interactive Brokers, expressed concern about the continuing sell-off despite a broader market rally. He also found it interesting that big banks were not immune to the sell-off. However, he believes it is premature to worry too much and considers the situation to be more idiosyncratic.
Michael Farr, the chief executive of investment advisory firm Farr, Miller & Washington, does not see a systemic problem in the industry. He believes the issues are more idiosyncratic and that people may be quick to ring alarm bells. Farr mentioned that if non-performing real estate loans become a widespread issue, it could force the Federal Reserve’s hand sooner.
Michael Reynolds, the vice president of investment strategy at Glenmede, emphasized the importance of monitoring banks with significant commercial real estate exposure. He mentioned that stress can spread quickly in the industry and that sentiment plays a crucial role in the banking system.
Matt Pestronk, the co-founder and president of real estate developer Post Brothers, believes that New York Community Bancorp is oversold and has a proven history of low loan losses. He expects rates to come down, easing pressure on floating rate loans and reducing loan losses. Pestronk also mentioned that the bank has a simple and time-tested model, differentiating it from other banks with more complicated models.
Martin Rauchenwald, a partner and leader of the financial services practice at Arthur D Little, warned that contractionary monetary policy, economic slowdowns, and high interest rates pose a real danger to financial institutions. He urged banks to reassess their portfolios and explore alternative financing options to avoid another crisis.
David Wagner, a portfolio manager at Aptus Capital Advisors, compared the recent sell-off to the events of March 2023. However, he clarified that the current situation is different, as it is primarily driven by company-specific issues rather than mismanagement of interest rate exposure. Wagner believes that the concerns surrounding New York Community Bancorp are idiosyncratic and not indicative of broader systemic issues.
While concerns about the health of the U.S. regional banking industry persist, experts have differing opinions on the severity and extent of the problems. Some believe that the sell-off is unjustified and that certain banks are being unfairly punished. Others highlight specific issues within individual banks but do not see a systemic problem. As the industry continues to navigate these challenges, it remains to be seen how regional banks will weather the storm and emerge stronger in the future.
