U.S. Regional Banks Suffer Another Sell-Off Amid Concerns Over New York Community Bancorp’s Real Estate Portfolio
The U.S. regional banking sector experienced another sell-off on Thursday, following losses from the previous day when New York Community Bancorp (NYCB) reported difficulties in its commercial real estate portfolio. This has raised concerns about the overall health of the industry. The KBW Regional Banking Index slipped 1.6%, marking its largest single-day decline since the collapse of Signature Bank in March 2023.
NYCB shares also took a hit, losing an additional 8.5% of their value and trading at $5.92. Although this partially recovered from deeper losses earlier in the day, the stock had experienced a record single-day drop of 37.6% on Wednesday. The frenzied selling in banking shares has reignited fears about regional lenders, despite many analysts and investors claiming that NYCB’s problems are mostly unique.
Alexander Yokum, a senior equity analyst at CFRA Research, commented on the shift in focus from deposits to credit quality: “Last year was definitely the year of deposits. No bank wanted to be in a position where they were seeing deposit outflows. This year, the story changes to credit quality.” Yokum also highlighted 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.” Morgan Stanley is also reviewing earnings estimates for the bank. Additionally, several banks, including Bank of America and UBS, have lowered their target prices for NYCB.
The sell-off extended beyond NYCB, with Western Alliance Bancorp’s shares falling 4.8%, Valley National Bancorp’s dropping 5%, and Comerica’s shares falling 2.1%. The S&P 500 Banks index also experienced a decline of approximately 1.2%.
The fall in U.S. regional bank stocks on Wednesday resulted in $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 noted that while NYCB has unique characteristics, its recent performance serves as a reminder of the risks that remain in the regional banking space.
NYCB provided an updated earnings presentation on Wednesday, including its net interest income (NII) forecast for 2024. The bank expects NII to range 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 decrease 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 potential credit deterioration in the office and multifamily property markets within the CRE sector. He stated, “If there is anything more ‘systemic’ in the results yesterday that needs to be watched, it’s that the bank said it thinks credit deterioration could occur in the office and multifamily property markets (CRE).”
The stock sell-off on Wednesday indicated that the recovery in the regional bank index may not be a straightforward path. Rick Meckler, a partner at Cherry Lane Investments, emphasized the need for individual regional banks to demonstrate positive results in a presumed non-recessionary and lower interest rate environment.
The repercussions of NYCB’s struggles have even reached global markets, with Japan’s Aozora Bank reporting its first annual net loss in 15 years due to massive loan-loss provisions for U.S. commercial property.
Overall, the recent sell-off in U.S. regional banks has raised concerns about the industry’s health, particularly regarding NYCB’s real estate portfolio. Investors and analysts are closely monitoring the situation and looking for signs of improvement in individual banks’ performance.
