Regional bank stocks plunged on Wednesday after New York Community Bancorp Inc (NYCB) reported an unexpected quarterly loss, fueled by a jump in provisions for credit losses. NYCB also slashed its dividend by over 70%. The news reignited investor fears about the health of regional banks in the face of a potential recession.
NYCB Reports Surprising $260 Million Loss
Shares of NYCB plunged as much as 38% on Wednesday after the bank reported a $260 million fourth-quarter loss. This compares to a profit of $106 million in the same period a year earlier. The loss was driven by a significant increase in money set aside for potential loan losses as the bank braces for multifamily loan defaults in the New York area.
NYCB took charges totaling $561 million tied to a potential commercial real estate meltdown, surprising investors who expected strong results after years of profits. This raises concerns that other regional banks could also be hit hard by credit issues in the near future.
| Key Figures from NYCB’s Q4 Results | |
|---|---|
| Net Loss | -$260 million |
| Provision for Credit Losses | $561 million |
| Dividend Cut | Over 70% to $0.17 per share |
The bank, which focuses lending on New York City apartment buildings, also slashed its quarterly dividend to 17 cents per share from 68 cents per share. This is intended to preserve capital given the uncertain economic outlook.
Regional Bank Selloff Accelerates
The shocking loss and dividend cut at NYCB accelerated the recent selloff in regional bank stocks over fears of a potential recession. The S&P Regional Banking ETF (KRE) plunged 8% on Wednesday, bringing its loss so far this year to 15%. Significant declines were seen across the sector:
- SVB Financial Group (SIVB) – Down 12%
- Citizens Financial Group (CFG) – Down 8%
- Regions Financial Corp (RF) – Down 11%
Many regional banks rallied in 2022 and 2023 due to rising interest rates. However, if the economy heads into recession, these banks are vulnerable due to high exposure to areas like commercial real estate and small business lending.
What’s Next for Regional Banks
The plunge in NYCB stock raises questions about the ability of other regional banks to navigate an economic downturn. Banks with significant multifamily and commercial real estate loan exposure in key markets are most at risk if property values decline. These include banks like:
- Signature Bank (SBNY)
- Customers Bancorp (CUBI)
- Banner Corp (BANR)
If defaults rise and collateral values drop, these banks may need to take significant provisions similar to NYCB. This would hurt profits and capital positions.
On the other hand, some analysts say the issues at NYCB are largely isolated and not representative of the broader regional banking sector. M&T Bank CEO Rene Jones noted on an earnings call that the Buffalo-based bank has taken a conservative approach to multifamily lending in NYC and he is “not losing any sleep” over commercial real estate.
However, investors are likely to punish other regional bank stocks in the near-term until managements can prove the strength of their balance sheets. It may take several quarters before the level of credit losses becomes clear. Regional banks focused outside major urban centers may prove more resilient than those with significant NYC exposure.
Bottom Line
NYCB’s surprising loss was a wake-up call on the risks for regional banks, especially those involved in commercial real estate lending. While some banks may be able to avoid significant issues if the economy heads south, the whole sector is likely to experience valuation pressure.
Investors would be wise to examine regional bank loan exposures closely before buying stocks in the sector at this point. Weaker players focused on major urban multifamily lending are most at risk over the next year if the economy tips into recession. Banks able to sidestep rising defaults would then become attractive investments at discounted prices.
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