U.S. regional banks sold off again on Thursday, adding to losses from a day earlier when New York Community Bancorp, reported pain in its commercial real estate portfolio, renewing fears about the industry's health.
The KBW Regional Banking Index slipped 1.6%, after seeing its biggest single-day decline since the collapse of Signature Bank in March 2023.
NYCB shares lost another 8.5% of their value and were last trading at $5.92, partially erasing deeper losses from earlier in the morning. The stock experienced a record single-day drop of 37.6% on Wednesday, according to LSEG.
The frenzied selling in banking shares has rekindled fears about regional lenders, even as many analysts and investors said the problems at NYCB were mostly unique.
"Last year was definitely the year of deposits. No bank wanted to be in a position where they were seeing deposit outflows. This year, the story changes to credit quality," said Alexander Yokum, senior equity analyst at CFRA Research, adding NYCB's exposure to real estate is bigger compared to peers.
Moody's has put its ratings on NYCB on review for a downgrade that could push it into "junk territory", while Morgan Stanley said it is reviewing earnings estimates for the bank. Many banks, such as Bank of America and UBS, also cut target prices for NYCB.
Western Alliance Bancorp's shares fell 4.8%, while those of Valley National Bancorp dropped 5%. Comerica's (CMA.N), opens new tab shares fell 2.1%.
The S&P 500 Banks index fell roughly 1.2%.
The fall of U.S. regional banks stocks on Wednesday translated into $685 million in paper profits for short sellers, according to data and analytics company Ortex.
NYCB's purchase of Signature Bank, along with its 2022 acquisition of Flagstar Bank, pushed its assets above a $100 billion regulatory threshold that is subject to stricter capital and liquidity requirements.
"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.
NYCB sees net interest income (NII) in 2024 between $2.8 billion and $2.9 billion, the midpoint of which is below the $2.88 billion analysts were expecting, according to LSEG data.
The bank updated its earnings presentation later on Wednesday to include its NII forecast, after not giving, a clear number earlier.
JPMorgan analyst Steven Alexopoulos maintained his "overweight" rating on NYCB's stock and said it remained the brokerage's top pick for 2024.
NII, Commercial real estate pressures
Investors and analysts say banks paying out higher interest rates on deposits would see an erosion in their NII - or net interest income, the difference between what lenders earn on loans and pay on deposits.
During first-quarter earnings, many regional banks also said NII was waning.
Another potential headache for regional banks is their exposure to the troubled commercial real estate (CRE) sector, which has been under pressure due to high borrowing costs and remote working.
NYCB's loss for the fourth quarter was driven by a $552 million provision for credit losses, part of which was allocated to its CRE portfolio where the bank specifically mentioned two loans, one office loan and one co-op loan.
"If there is anything more 'systemic' in the results yesterday that needs to be watched, it's that the bank said it thinks credit deterioration could occur in the office and multifamily property markets (CRE)," said David Wagner, portfolio manager at Aptus Capital Advisors.
The stock sell-off on Wednesday suggested the recovery in the regional bank index may not be a straight line, said Rick Meckler, partner at Cherry Lane Investments.
"Individual regional banks will need to begin to show more positive results in what investors presume will be a non-recessionary and lower interest rate environment," he added.
In a sign of global repercussions, Japan's Aozora Bank flagged its first annual net loss in 15 years as it set aside massive loan-loss provisions for U.S. commercial property.