U.S. Regional Banks Sell Off as New York Community Bancorp Reports Pain in Commercial Real Estate Portfolio
The regional banking sector in the United States experienced another day of losses as New York Community Bancorp (NYCB) reported difficulties in its commercial real estate portfolio. This news has reignited concerns about the overall health of the industry. The KBW Regional Banking Index declined by 1.6%, marking its largest single-day drop since the collapse of Signature Bank in March 2023.
NYCB shares also suffered, losing an additional 8.5% of their value and trading at $5.92. This decline partially offset deeper losses from earlier in the day. On Wednesday, the stock experienced a record single-day drop of 37.6%, according to LSEG.
The selling frenzy in banking shares has raised fears about regional lenders, although many analysts and investors believe that NYCB’s problems are mostly unique. Alexander Yokum, a senior equity analyst at CFRA Research, noted that last year was focused on deposits, with banks striving to avoid deposit outflows. However, this year, the focus has shifted to credit quality. Yokum added that NYCB has a larger exposure to real estate compared to its peers.
Moody’s has placed NYCB’s ratings on review for a potential downgrade that could push it into “junk territory.” Additionally, Morgan Stanley is reviewing earnings estimates for the bank. Several banks, including Bank of America and UBS, have also lowered their target prices for NYCB.
The sell-off in U.S. regional bank stocks on Wednesday resulted in approximately $685 million in paper profits for short sellers, according to data and analytics company Ortex.
NYCB’s acquisition of Signature Bank and its 2022 acquisition of Flagstar Bank pushed its assets above the $100 billion regulatory threshold, subjecting it to stricter capital and liquidity requirements.
Jefferies analysts emphasized that while NYCB has unique characteristics, its decline serves as a reminder of the risks that remain in the regional banking space.
NYCB provided an update on its earnings presentation, including its net interest income (NII) forecast for 2024. The bank expects NII between $2.8 billion and $2.9 billion, with the midpoint falling below analysts’ expectations of $2.88 billion.
Despite the challenges, JPMorgan analyst Steven Alexopoulos maintained an “overweight” rating on NYCB’s stock and identified it as the brokerage’s top pick for 2024.
Investors and analysts have expressed concerns about banks paying higher interest rates on deposits, which could lead to a decline in NII. Many regional banks have already reported a decline in NII during the first quarter.
Another potential issue for regional banks is their exposure to the troubled commercial real estate (CRE) sector. High borrowing costs and remote working have put pressure on this sector. NYCB’s loss in the fourth quarter was driven by a $552 million provision for credit losses, with a portion allocated to its CRE portfolio. The bank specifically mentioned two loans, one office loan, and one co-op loan.
David Wagner, a portfolio manager at Aptus Capital Advisors, highlighted the bank’s concern about potential credit deterioration in the office and multifamily property markets within the CRE sector.
The stock sell-off on Wednesday indicates that the recovery in the regional bank index may not be a straightforward path. Rick Meckler, a partner at Cherry Lane Investments, noted that individual regional banks will need to demonstrate more positive results in a presumed non-recessionary and lower interest rate environment.
The repercussions of NYCB’s struggles have even reached global markets. Japan’s Aozora Bank reported its first annual net loss in 15 years due to significant loan-loss provisions for U.S. commercial property.
Overall, the challenges faced by NYCB and the subsequent sell-off in regional bank stocks have raised concerns about the industry’s health. While some believe that NYCB’s issues are unique, others emphasize the need for regional banks to demonstrate positive results in a changing economic environment. The impact of these challenges extends beyond the U.S., as seen with Aozora Bank’s net loss in Japan. As the industry navigates these obstacles, investors and analysts will closely monitor the performance and strategies of regional banks moving forward.
