Regional U.S. bank stocks fell sharply on Wednesday, led by a 37.6% decline in New York Community Bancorp (NYCB.N) shares, after the company unexpectedly declared a loss and reduced its dividend, rekindling concerns about the stability of other lenders.
(Photo : by TIMOTHY A. CLARY/AFP via Getty Images)
The KBW Regional Banking Index (.KRX) finished the day down 6%, the most in a single day since March 13 of last year, when New York's Signature Bank failed due to depositor fear brought on by Silicon Valley Bank's failure a few days earlier.
Deposits have steadied, yet Wednesday's market downturn underscores persistent worries about the financial health of regional lenders.
Market Jitters Over Regional Banks and Interest Rates
Concerns include the impact of retaining deposits on net interest income (NII), a key driver of lending profits. Brian Mulberry, Client Portfolio Manager at Zacks Investment Management, noted that the sector, influenced by emotional trading, faces challenges from higher interest rates, affecting earnings and NII for many banks. The market was taken aback by the sell-off.
According to Trade Alert data, investors in options backed by the SPDR S&P regional bank exchange traded fund (.KRE), opens new tab, had a positive bias, particularly for the short term.
Those options saw four times the normal speed of trading on Wednesday as investors braced themselves for a more pessimistic outlook. Calls, which are often a bullish bet, were dominated 3-to-1 by put options, which are typically acquired to reflect a pessimistic or defensive perspective.
Steve Sosnick, Chief Strategist at Interactive Brokers, noted, "Many traders believe that warnings of the type we saw from NYCB are like cockroaches - if you see one, there must be more hiding just out of sight."
Investor concerns intensified as the Federal Reserve maintained interest rates on Wednesday. The impact of high rates, intended to curb inflation, has negatively affected profits from loans for regional banks and the value of their securities.
Concerns over regional banks' financial health have surfaced, with worries about the impact of higher interest rates on earnings. The recent sell-off in deposits has stabilized, but investors remain wary of regional lenders. The fear is that the cost of maintaining deposits could squeeze net interest income (NII), a key driver of lending profits.
The Federal Reserve's decision to leave interest rates unchanged has further heightened investor jitters. Higher rates, aimed at curbing inflation, have weighed on regional bank loan profits and the value of the securities they hold.
Repricing and Sector Concerns: NYCB's Impact on Regional Banks
The market is undergoing a repricing of the first rate cut, moving it from March to May, resulting in an extended period of paying over 5% to depositors while loan demand is weakening. Shares of Valley National Bancorp, Citizens Financial Group, and Regions Financial Corp have experienced declines, reflecting the concerns in the sector. Some analysts believe the issues faced by New York Community Bancorp (NYCB) are specific to its balance sheet, while others argue that the regional banking space is not facing the same pressure observed in March of the previous year.
In early trade, NYCB's stock dropped as much as 46%, although losses were eventually curtailed.
The bank, which last year purchased a portion of Signature Bank's assets, said that it was increasing capital to strengthen its balance sheet and reducing its dividend by 70%.
With the purchases of Signature Bank and the acquisition of Flagstar Bank in 2022, NYCB's balance sheet crossed a regulatory barrier of $100 billion, making it subject to more stringent capital and liquidity requirements. In December, its assets totaled $116.3 billion.
Analysts at NYCB also seemed taken aback, and occasionally expressed frustration with the bank's management for not providing enough information, particularly about their NII forecast.
NYCB's substantial $552 million provision for credit losses resulted in an adjusted loss of $185 million for the company. The majority of the provisions went toward its commercial real estate holdings, which, like the holdings of many lenders, have been burdened by persistent office vacancies caused by the epidemic.
