Regional Banking Shares Drop Amid Investors' Concerns About Sector

Regional banking shares in the United States experienced a significant decline for the second consecutive day Thursday (Feb. 1).

The sell-off was triggered by New York Community Bancorp’s (NYCB) report, released Wednesday (Jan. 31), on the challenges it faced in its commercial real estate portfolio, which has renewed fears among investors and analysts, CNBC reported Thursday.

The KBW Regional Banking Index dropped 1.6%, following its largest single-day decline since the collapse of Signature Bank in March 2023, according to the report. 

NYCB’s shares suffered an additional 8.5% loss, trading at $5.92, partially recovering from deeper losses earlier in the day, the report said. Moody’s has put NYCB’s ratings on review for a potential downgrade to “junk territory,” while Morgan Stanley is reviewing earnings estimates for the bank. Bank of America and UBS have reduced target prices for NYCB. 

The decline in regional banking stocks has reignited concerns about the stability of regional lenders, despite some analysts and investors believing that NYCB’s issues are mostly unique to the bank, per the report.

Alexander Yokum, a senior equity analyst at CFRA Research, highlighted that last year’s focus for banks was on deposits, but this year the story has shifted to credit quality, according to the report. He also noted that NYCB has a larger exposure to real estate compared to its peers.

JPMorgan analyst Steven Alexopoulos maintained an “overweight” rating on NYCB’s stock, considering it the brokerage’s top pick for 2024, per the report.

Regional banks, in general, are facing pressure on their net interest income due to higher interest rates on deposits, leading to erosion in their earnings, the report said. Another concern for regional banks is their exposure to the troubled commercial real estate sector, which has been affected by high borrowing costs and remote working trends.

The impact of these developments is not limited to the United States, as Japan’s Aozora Bank reported its first annual net loss in 15 years due to significant loan-loss provisions for U.S. commercial property, per the report. 

Wednesday’s announcement of an unexpected loss by NYCB surprised investors, who had considered the bank one of the winners of the 2023 crisis that saw the downfall of Signature Bank, Silicon Valley Bank and First Republic.

Amid last year’s banking turmoil, NYCB acquired the failed Signature Bank, taking over most of its deposits and a third of its assets.