US regional banking shares under lens after NYCB slide

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

WASHINGTON  – 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 percent on Wednesday, dragged down by New York Community Bank (NYCB), which experienced a record single-day drop of 37.6 percent, according to LSEG data.

The Federal Reserve’s decision to hold interest rates steady on Wednesday also weighed on the broader market.

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 percent and posted a surprise loss, were mostly unique to its balance sheet.

The bank, which bought some of Signature Bank’s assets last year, said it was building capital to bolster its balance sheet.

READ: FDIC announces deal to sell Signature Bank assets to New York Community Bancorp

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. It had assets of $116.3 billion as of December, compared to $90.1 billion in December 2022. The bank’s balance sheet has increased by nearly 30 percent in one year, according to NYCB’s own data.

Risks in regional banking space

“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.

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 have warned that NII, which drives lending profits, is waning.

READ: US bank profits fall as competition for deposits erodes lending margins

Investor jitters were also amplified on Wednesday as the Federal Reserve left interest rates unchanged. High rates aimed at taming inflation have weighed on regional bank loan profits, as well as the value of securities they hold.

“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 suggested 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