WASHINGTON/NEW YORK, Feb 2 (Reuters) – Investors believe U.S. regional banks are out of the woods after last year’s collapse of New York Community Bank (NYCB.N), a new tab will open. The radar lender’s earnings report comes nearly a year after the two bank failures, and as a warning to investors accustomed to the industry’s sensitivity to the Federal Reserve’s high interest rates, the decline in local bank stocks comes as a warning to investors. caused it.
Investors say NYCB’s compounding problems are specific to the company’s balance sheet, but the earnings component is driven by high Fed prices that continue to weigh on commercial real estate (CRE) portfolios and loan margins. This highlights the continued sensitivity of regional financial institutions to interest rates.
The Fed’s decision to keep interest rates on hold on Wednesday has prompted traders to push for initial interest rate hikes from March through May, and the pressure will last longer than expected, futures data shows.
“There are still fundamental problems with the business model that are impacting many local and regional banks in a high interest rate environment,” Peter Orszag, CEO of investment bank Lazard, said in an interview with Reuters on Thursday. I am giving,” he said.
“Those problems were out of crisis, but they were still there,” said Orszag, who previously served as White House budget director in the Obama administration.
NYCB stock has plummeted 45% in two days, and the broader KBW Regional Bank Index (.KRX) is down more than 7% this week.
The plunge comes nearly a year after Silicon Valley Bank’s collapse in March 2023, when high interest rates led to paper losses on corporate bonds, sparking a deadly deposit run that led to the collapse of Signature Bank days later. .
NYCB bought up Signature Bank’s assets, its balance sheet exceeded the $100 billion regulatory threshold, and strict capital and liquidity controls were triggered. So banks cut their dividends to preserve cash.
However, NYCB also posted a $185 million loss after setting aside cash to cover two failed loans, one for a co-op and one for offices.
“This has made the Street more concerned about the negative impact on all banks,” said MacRae Sykes, portfolio manager for the Gabelli Financial Services Opportunities ETF (GABF.P), which tracks multiple bank stocks. A new tab will open containing the . “Both factors continue: the Fed becoming more hawkish and concerns about commercial real estate impacting bank sentiment.”
Hit to profitability
Traders are holding bullish positions in SPDR S&P Regional Bank Exchange Traded Fund (.KRE) options, according to data from Trade Alerts, opening in new tab ahead of Wednesday. It seems that he was surprised. Other banks with high CRE exposure, including Valley National Bank (VLY.O), Open in new tab, and East West Bank, have also fallen, according to S&P Global Market Intelligence data. The banks did not immediately respond to requests for comment outside business hours.
NYCB CEO Thomas Cangemi said on a conference call with analysts that the co-op loan was a “one-off,” but the bank said on its earnings call that allowing for losses would improve credit quality. He said it has been strengthened.
“We believe the stock price will recover as the market continues to appreciate the value-enhancing measures taken by NYCB,” a NYCB spokesperson said in an email.
NYCB also reported a 16% decrease in net interest income (NII). NII is the difference between the income earned by lenders on loans and the income paid on deposits, and is a core factor in local banks’ profits. NYCB expects NII to be between $2.8 billion and $2.9 billion in 2024, but that midpoint is below analysts’ expectations of $2.88 billion, according to LSEG data.
High interest rates allowed banks to earn more profits on loans, but they also forced them to pay more to maintain deposits, putting pressure on NII. According to JPMorgan analysts, NYCB’s interest-bearing deposit costs rose 29 basis points sequentially.
The decline in NII will contribute to a “significant decline in profitability” for NYCB, analysts at Keefe, Bruyette & Woods said.
Many other regional banks reported lower NII during their quarterly results, and analysts expect rising deposit costs to continue to pressure profitability, Reuters reported.
However, some investors pointed out that the CRE market is highly diverse and not all CRE exposures are created equal. Other sources say many regional financial institutions have strong balance sheets and sufficient reserves to withstand higher interest rates a little longer, and the sector will benefit as the U.S. economy avoids a recession. He said he was deaf.
“I think this is an opportunity to buy select banks,” said Tony Ross, chief investment officer at Wilmington Trust Investment Advisors, part of regional lender M&T Bank.
“Certainly, I would not buy this index. Some regional banks have more non-performing assets than others in the commercial sector, so I think they need to be selective. .”
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Written by Michelle Price. Reporting by Lananh Nguyen, Sinead Carew, Laura Matthews, Davide Barbuscia, Medha Singh, Nupur Anand. Editing: Megan Davis and Sonali Paul
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