On Wednesday, January 31st local time, the financial report of New York Community Bank (NYCB) fell significantly short of expectations and reduced dividends, resulting in multiple investment banks downgraded their stock ratings. The bank's stock price fell to its lowest level since 2000.
Although concerns about banks in the US region have not dissipated, some institutions believe that the market is "severely overreacting", and the weekly decline in regional bank equity has opened up buying opportunities.
NYCB Financial Report "Thunderstorm"
The 2023 Q4 financial report released by NYCB on Wednesday showed that the bank incurred a loss of up to $252 million, far below the market's expected profit of $206 million. The bank also disclosed a loan loss provision of $552 million, significantly reducing dividends from 17 cents per share to 5 cents.
Affected by this, NYCB's stock price recorded a record 38% daily decline on Wednesday and then fell again by 11% on Thursday, reaching its lowest level since 2000. The Dow Jones Regional Banking Index (KBW) also fell, with a two-day decline of 8%, marking the largest decline since the regional banking crisis in March 2023.
Since the close of trading on Wednesday, investment banks such as Compass Point Research, Jefferies, and RBC Capital Markets have all lowered their recommended hold ratings for NYCB stocks. Raymond James and CFRA also lowered their ratings before Wednesday's financial reports were released. Moody's has also included all long-term and short-term ratings of NYCB and its subsidiary Flagstar Bank on a potential downgrade watch list.
NYCB's CEO Thomas Cagemi stated that the bank's poor quarterly performance was due to the acquisition of nearly $40 billion in assets from the previously bankrupt Signature Bank, resulting in total assets exceeding $100 billion. As a result, the bank needs to comply with stricter regulatory standards, including risk and leverage based capital requirements, liquidity standards, overall risk management, and stress testing requirements. To this end, the bank took action in the fourth quarter of 2023 to strengthen risk management processes and strengthen capital to support its balance sheet.
Based on NYCB's financial performance for the entire year last year, its net revenue was $2.37 billion, more than three times its profit for 2022. But excluding one-time expenses and the $2.2 billion gain from acquiring the signing bank, the annual net income decreased by 4% to $609 million.
Jon Arfstrom, an analyst at RBC Capital Markets, wrote in a client report, "NYCB is seeking to become a larger bank, but the accompanying growth pains will affect its earnings in the near to medium term. We believe that the bank needs to perform better in credit management to regain investor confidence."
Concerns about regional banks have not dissipated
On Thursday, bank stocks in other regions such as Valley National Bancorp, Western Alliance Bancorp, Zions Bancorp, and BankUnited also fell more than 5%. The continuous decline in NYCB and other regional banking stocks indicates that the market has not fully emerged from the shadow of last year's regional banking crisis. Last year's crisis led to the successive bankruptcies of Silicon Valley Bank, Signature Bank, and First Republic Bank.
At present, the issue of commercial real estate risk exposure of regional banks remains a focus of market attention. Concerns about its weak credit have led to the overall performance of regional bank stocks consistently underperforming the market. Another reason why the market is concerned about NYCB this time is that the bank holds a significant amount of commercial real estate loans.
Compared to Silicon Valley Bank, which went bankrupt last year, NYCB has a better liquidity situation. As of the end of 2023, the total deposit size of NYCB was $81.4 billion, of which available cash reached $11.5 billion, while the total deposit and cash at the time of Silicon Valley Bank's bankruptcy were approximately $173.1 billion and $13.4 billion, respectively. NYCB's deposit to cash ratio was twice that of Silicon Valley Bank's bankruptcy.
However, the proportion of commercial real estate loans in NYCB is indeed high. Its fourth quarter financial report in 2023 shows that NYCB holds over $50 billion in commercial real estate loans, accounting for 43% of total assets. According to Federal Reserve data, as of December 2023, commercial real estate loans accounted for approximately 6.5% of the total assets of large banks, but 30% of the total assets of small banks.
However, in the past few weeks, dozens of regional banks and large US banks have released their latest financial reports, which have not triggered such a fierce reaction or sent the same level of challenge signals. "Banks that previously released financial reports were very optimistic about credit quality expectations for 2024, stating that losses would increase, but more would be normalization rather than deterioration," said Herman Chan, a regional banking analyst at Bloomberg
Falling out of buying opportunities?
Investors have sold NYCB for two consecutive days, causing its market value to drop by over $3 billion. According to data from S3 Partners, in terms of market value profit, short sellers of the stock made a net profit of approximately $100 million on Wednesday alone. Some analysts and investors have indicated that the market reaction has been somewhat excessive, as the sharp decline in regional bank stocks has created buying opportunities.
Morgan Stanley analyst Steven Alexopoulos is one of them. He maintained his overweight rating on NYCB, stating that the issues affecting this financial report were unique, and therefore the record breaking decline was a "serious overreaction" in the market. EDWARD AL-HUSSAINY, senior interest rate and currency analyst at Columbia Asset Management, believes that NYCB's relative proportion is negligible across the entire US banking system, even within the banking system of New York State. Therefore, the bank's decision is troublesome for shareholders, but has no spillover effects on regional banks and the US banking system.
David George, an analyst at investment bank Baird, further stated that "the sell-off caused by the commercial real estate panic this week has created solid buying opportunities for regional banking stocks." He recommended regional banking stocks such as Comerica Inc., KeyCorp, and Trust Financial Corp.