US regional banking shares under lens after NYCB slide

[February 01, 2024]  WASHINGTON (Reuters) -U.S. regional bank shares were under the lens again on Thursday after the sector's main benchmark experienced its biggest single day decline since the collapse of Signature Bank in March last year.

The KBW Regional Banking Index fell 6% on Wednesday, dragged down by New York Community Bancorp (NYCB), which experienced a record single-day drop of 37.6%, according to LSEG data. The Federal Reserve ruling out a rate cut in March also weighed on the broader market on Wednesday.

The sell-off rekindled investor fears over the health of regional lenders, even as many analysts and investors said the problems at NYCB, which slashed its dividend 70% and posted a surprise loss, were mostly unique to its balance sheet.

The Signature Bank purchases, along with its 2022 acquisition of Flagstar Bank, pushed NYCB's balance sheet above a $100 billion regulatory threshold that is subject to stricter capital and liquidity requirements.

NYCB shares inched up 1.2% before the bell on Thursday. The bank updated its earnings presentation later on Wednesday to include its net interest income (NII) forecast, after not giving a clear number earlier despite repeated requests by JPMorgan analyst Steven Alexopoulos.

NYCB sees NII in 2024 between $2.8 billion and $2.9 billion, while analysts were expecting $2.88 billion, according to LSEG data.

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.

"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.

A man walks past a closed branch of the New York Community Bank in New York City, U.S., January 31, 2024. REUTERS/Mike Segar/File Photo

Deposits have stabilized since last year's upheaval, but some investors and analysts have warned the cost of retaining those deposits would squeeze regional lenders' net interest income (NII), the difference between what lenders pay on deposits and earn on loans.

During first-quarter earnings, many regional banks warned that NII, which drives lending profits, was waning.

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

NYCB's loss for the fourth quarter was driven by a $552 million provision for credit losses, the lion's share of which was allocated to its CRE portfolio.

"Many investors have looked for the regional bank index to continue its recovery in 2024," said Rick Meckler, partner at Cherry Lane Investments, adding Wednesday's moves were a suggestion that it may not be a straight line recovery.

"Individual regional banks will need to begin to show more positive results in what investor 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 took massive loan-loss provisions for U.S. commercial property.

(Reporting by Michelle Price, Nupur Anand and Niket Nishant; editing by Megan Davies, Stephen Coates and Saumyadeb Chakrabarty)

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