Investors who believed that U.S. regional banks had overcome challenges from the previous year were rudely awakened by New York Community Bank (NYCB). The subtle lender's recent earnings report triggered a sell-off in regional bank shares, serving as a stark warning to investors who had become complacent regarding the sector's resilience to high Federal Reserve interest rates, even after the failures of two banks nearly a year ago.
While NYCB's specific challenges are distinct to its balance sheet, aspects of its earnings underscored the ongoing vulnerability of regional lenders to high Fed rates.
This sensitivity continues to put pressure on commercial real estate (CRE) portfolios and lending margins, as observed by cautious investors. The persisting pressure is anticipated to endure longer than expected, particularly after the Federal Reserve's decision to maintain rates, leading traders to reevaluate rate projections.
Peter Orszag, the CEO of investment bank Lazard, highlighted an underlying business model problem affecting numerous regional and community banks in a higher rate environment. Orszag, a former director of the White House budget office during the Obama administration, emphasized that while these issues may have subsided from crisis levels, they still linger.
NYCB's stock experienced a drastic 45% decline in just two days, with the broader KBW Regional Banking Index falling over 7% in the same week. This sell-off, reminiscent of the events following Silicon Valley Bank's failure in March 2023, which triggered a deposit run on Signature Bank, has reignited concerns, as we read in Reuters.
NYCB's subsequent acquisition of Signature Bank's assets pushed its balance sheet over a $100 billion regulatory threshold, resulting in stringent capital and liquidity rules and a dividend cut to conserve cash.
The recent sell-off also impacted other banks with high CRE exposure, such as Valley National Bank and East West Bank, as observed in the data from S&P Global Market Intelligence. The unexpected nature of the downturn caught investors off guard, especially those holding bullish positions in options on the SPDR S&P regional bank exchange traded fund ahead of the events.
NYCB's CEO, Thomas Cangemi, asserted that the cooperative loan issue was a one-time occurrence, emphasizing in an analyst call that the losses strengthened the bank's credit profile. Despite the challenges, NYCB expressed confidence that the market would recognize the value-enhancing actions taken, leading to a recovery in share prices.
In addition to the specific issues faced by NYCB, the bank reported a 16% decline in net interest income (NII), a core driver of regional bank profits. The NII decrease, attributed to higher interest rates impacting deposit costs, is expected to contribute to markedly lower profitability for NYCB, according to analysts.
This trend is echoed across other regional banks, with many reporting diminishing NII during quarterly earnings and anticipating ongoing pressure on profitability due to rising deposit costs.
02.02.2024
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