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U.S. regional banking shares tumble for second straight day

A sign is pictured above a branch of the New York Community Bank in Yonkers, New York, U.S., January 31, 2024. 

Mike Segar | Reuters

A sell-off in shares of U.S. regional banks continued on Thursday, adding to losses from a day earlier when New York Community Bancorp, shocked the market as it reported pain in its commercial real estate portfolio, renewing fears about the industry’s health.

The KBW Regional Banking Index slipped 4.8% after seeing its biggest single-day decline since the collapse of Signature Bank in March last year. It was on course for its biggest two-day percentage drop since June 2020.

NYCB shares lost another 13.4% of their value and were last trading at $5.60. The stock experienced a record single-day drop of 37.6% on Wednesday, according to LSEG.

The frenzied selling in banking shares has rekindled fears about regional lenders, even as many analysts and investors said the problems at NYCB were mostly unique.

“Financial institutions need to urgently reassess their portfolios and explore alternative financing options – or risk being hit by a new crisis,” said Martin Rauchenwald, partner at management consulting firm Arthur D. Little.

NYCB’s purchase of Signature Bank, along with its 2022 acquisition of Flagstar Bank, pushed its assets above a $100 billion regulatory threshold that is subject to stricter capital and liquidity requirements.

“We believe NYCB has several idiosyncratic characteristics, but the result and reaction are reminders of risks that remain in the regional banking space,” wrote Jefferies analysts.

NYCB sees net interest income (NII) in 2024 between $2.8 billion and $2.9 billion, the midpoint of which is below the $2.88 billion analysts were expecting, according to LSEG data.

The bank updated its earnings presentation later on Wednesday to include its NII forecast, after not giving a clear number earlier, in the day despite repeated requests by JPMorgan analyst Steven Alexopoulos on its post-earnings call.

Alexopoulos maintained his “overweight” rating on NYCB’s stock and said it remained the brokerage’s “top pick for 2024.”

“We see the issues impacting NYCB as being specific to the company with little read-through to the broader regional banks. The sell-off in NYCB is overdone in our view and the stock is poised to rebound materially,” he said.

Moody’s has, however, put its ratings on NYCB on review for a downgrade that could push the bank into the “junk territory”.

Western Alliance Bancorp’s shares fell nearly 11%, while those of Valley National Bancorp  dropped 8.8%. Comerica’s  shares fell 5.8%.

The S&P 500 Banks index also fell nearly 2.7%.

NII, Commercial real estate pressures

Investors and analysts have warned that banks paying out higher interest rates on deposits would see an erosion in their NII – the difference between what lenders earn on loans and pay on deposits.

During first-quarter earnings, many regional banks also said NII was waning.

Another potential headache for regional banks is their exposure to the troubled commercial real estate (CRE) sector, which has been under pressure due to high borrowing costs and remote working.

NYCB’s loss for the fourth quarter was driven by a $552 million provision for credit losses, part of which was allocated to its CRE portfolio where the bank specifically mentioned two loans, one office loan and one co-op loan.

“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),” said David Wagner, portfolio manager at Aptus Capital Advisors.

“But that sentiment hasn’t been echoed by any of NYCB’s peers such as Regions Financial or KeyCorp, so this may be a function of bank-specific poor loans.”

The stock sell-off on Wednesday suggested that the recovery in the regional bank index may not be a straight-line recovery, said Rick Meckler, partner at Cherry Lane Investments.

“Individual regional banks will need to begin to show more positive results in what investors presume will be a non-recessionary and lower interest rate environment,” Meckler added.

Meanwhile, on Thursday, Japan’s Aozora Bank flagged its first annual net loss in 15 years as it set aside massive loan-loss provisions for U.S. commercial property.

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