Shares in New York Community Bank (NYCB) and other regional lenders might look attractive on a valuation basis, but analysts say it's too soon to call a bottom in the sector.
NYCB stock continued reeling on Wednesday after Moody's Investors Services downgraded the troubled regional bank's credit rating two notches to junk. Shares have lost about 60% of their value so far this year after NYCB posted a surprise fourth-quarter loss, hurt by growing losses on commercial real estate. NYCB cut its dividend by 71% to shore up its capital levels, further spooking investors.
"The downgrade reflects Moody’s views that NYCB faces high governance risks from its transition with regards to the leadership of its second and third lines of defense, the risk and audit functions of the bank, at a pivotal time,” Moody's said in a statement.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
NYCB named Alessandro DiNello, former CEO of Flagstaff bank, to executive chairman from non-executive chairman, effective immediately.
The latest regional back fears are sort of a reprise of 2023, when the collapses of Silicon Valley Bank and Signature Bank sparked turmoil throughout the regional bank sector in March, necessitating government intervention. NYCB's problems stem in part from its acquisition of $40 billion of assets from Signature Bank. The move raised NYCB's total assets above $100 billion, lifting its capital requirements in the process.
And while the worst of the crisis appears to have passed, the big-picture view suggests that investors would do well to wait before risking their capital on seemingly cheap regional bank stocks.
Regional bank stock risks
For one, picking individual stocks is always riskier than making broader, more diversified bets. It's also the case that industry analysts had a consensus recommendation of Buy on Silicon Valley Bank right up until the moment it failed. Even the lone analyst who rated SVB shares at Sell was shocked by the speed of the bank's collapse.
That leaves the SPDR S&P Regional Banking ETF (KRE) as the most obvious way to wager on a sector-wide recovery. And by some measures, it does indeed look cheap. After all, the largest and most widely traded regional bank exchange-traded fund lost more than 10% of its value for the year-to-date – a period in which the broader market gained about 5% on a price basis.
Bulls would argue that the worst is over; that regional bank stocks have been sufficiently discounted to reflect their risks. It might even be time to go bargain hunting in the sector. Bears – and merely more cautious types – are understandably worried that there are other shoes to drop.
It's a tough call for sure. If the idea is to buy low, regional banks as represented by KRE could offer a compelling entry point. Then again, putting cash to work in KRE at current levels might be what's known on Wall Street as trying to catch a falling knife.
So which is it? Based on fundamentals alone, investors should probably look for outperformance elsewhere.
What's particularly worrisome is what Nicholas Colas and Jessica Rabe, co-founders of DataTrek Research, have noticed. U.S. regional banks have barely grown their aggregate dividend payouts since 2006-2007.
"Their stocks are, unsurprisingly, flat versus then," the strategists write. "This group’s latest troubles (higher interest rates, CRE) hit a sector with a long track record of paltry shareholder value creation."
The duo warns that "with dividend yields well below 10-year Treasuries, regionals look very risky here."
Industry analysts say that while the U.S. doesn't have a regional bank problem, it does have a mounting CRE problem, one that will take a couple of years to clean up. In the meantime, bargain hunting in the sector is best left to those with a very high tolerance for risk.
Related Content
-
Dow Hits New Intraday High on Fed Day: Stock Market TodayNot even the most important stock in the world could keep the oldest equity index down on a significant day for markets.
-
Savings Goal CalculatorTools Want to know how much you need to save each month to reach your financial goals? Our calculator helps you build a realistic savings plan.
-
Dow Hits New Intraday High on Fed Day: Stock Market Today
Not even the most important stock in the world could keep the oldest equity index down on a significant day for markets.
-
5 Top Tech Disruptors to Watchmultibagger stocks Big change catalyzed by top tech disruptors often leads to big growth.
-
Gray Divorce Can Throw Your Retirement a Curveball: What to KnowIf you're entering retirement and going through a divorce at the same time, you've got some work to do to shore up your long-term financial security.
-
I'm a Real Estate Investing Expert: Optional 721 UPREIT DSTs Can Be the Best of Both WorldsBefore investing in any 721 UPREIT exchange, look for one that offers a straightforward, investor-friendly exit.
-
Markets Are Quiet Ahead of Fed Day: Stock Market TodayInvestors, traders and speculators appear to be on hold amid an unusually fraught Fed meeting.
-
5 Multibagger Stocks With Amazing Returns in 2025multibagger stocks As the term suggests, multibagger stocks multiply your money – gains of 1,200%, for example. Here's where to look for that kind of performance this year.
-
Investing Freebies: Perks You Get for Owning These StocksWhile the biggest investing returns come over the long term, these companies offer instant gratification for investors with several freebies and perks.
-
How an Expired Passport Thwarted Blackmail (and What Other Important Documents You Should Keep)An optometrist produced his expired passport to foil a blackmail attempt by the daughter of a former employee. After proving he was out of the country on the date of a forged diary entry, he took it a step further.
