What’s really going on with bank stocks

New York
CNN
 — 

On Wednesday, the Federal Reserve ditched a line it used in every meeting statement since three banks failed last spring, which said that the “US banking system is sound and resilient.”

Coincidentally, though, more people were wondering that day if the banking system was indeed sound and resilient as shares of New York Community Bancorp (NYCB) plunged, ultimately closing down 38% on Wednesday. On Thursday, the stock shed an additional 11%.

The steep losses came after the regional lender reported a surprise loss of $252 million last quarter compared to a $172 million profit in the fourth quarter of 2022. The company reported $552 million in loan losses, a significant increase from $62 million the prior quarter.

Word quickly spread on Wall Street that the regional bank was under pressure, igniting a bout of selling of other bank stocks over fears of contagion.

The KBW Regional Banking Index closed down 6% on Wednesday. But by Thursday, selling pressure eased a little, with the index down 2% at market close.

Still, individual bank stocks continued to experience some blowback. Over the course of those two days, shares of Western Alliance Bancorp (WAL) and Zions Bancorporation (ZION) lost 13% and 12%, respectively.

Last year’s banking turmoil certainly makes it hard for investors and depositors to shrug off any signs of weakness in the sector and say, “This too shall pass.” Yet that’s exactly what analysts believe may happen this time.

NYCB was a standout during last year’s banking crisis. Unlike many fellow regional banks, it held on to the vast majority of its deposits. That left it with enough cash on hand to purchase close to $40 billion in assets, including $13 billion worth of loans, from now-failed Signature Bank at a steep discount.

The acquisition brought NYCB’s total assets above $100 billion. Crossing that threshold is significant for banks since it means, by law, they have to set aside more capital to protect against future losses. That limits the amount of money banks can loan out, however.

The transition to comply with the new regulations took a toll on the bank last quarter, NYCB CEO Thomas Cangemi said on the company’s Wednesday earnings call.

He also highlighted that the banks’ losses were tied to faulty office building loans.

But Chris Marinac, director of research at Janney Montgomery Scott, told CNN he’s not concerned NYCB is on the brink of failure.

“Investors are spooked since they thought NYCB was exonerated because they won a failed bank,” he said. “In reality, NYCB is adapting to higher standards and trying to be early and not delay or slow play being a large bank above $100 billion.”

NYCB declined to comment on the bank’s stock movement since Wednesday and its outlook.

The selloff that hit other regional bank stocks is “likely overdone given idiosyncratic factors tied to NYCB,” Bank of America analysts said in a note on Thursday.

“However, higher losses tied to commercial real estate (CRE) office exposure, increase in criticized loans tied to multi-family CRE are a reminder of ongoing credit normalization that we are likely to witness across the industry,” the analysts said.

That’s having a big impact on Japan’s Aozora Bank, which said Thursday that its bad loans tied to US offices were partly to blame for its projected annual loss of 28 billion yen ($190 million) last year. The stock closed 26% lower Thursday.

It’s likely to be some time before NYCB has the potential to recoup much of its losses from this week. But will the pain continue for other bank stocks?

Marinac isn’t too concerned.

Looking back to last May, when First Republic failed two months after Signature and Silicon Valley Bank, “banks traded very weakly for several days, then calm and rational investors came back in and stock prices stabilized,” Marinac said. “I expect the same here, NYCB is an opportunity at [Thursday’s] price and we are still recommending the stock.”