Does NYCB's Selloff Make Regional Bank Stocks a Buy?
Regional bank stocks might look cheap as NYCB spirals, but analysts caution against going bargain hunting just yet.
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.
Sign up for Kiplinger’s Free E-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
Dan Burrows is Kiplinger's senior investing writer, having joined the august publication full time in 2016.
A long-time financial journalist, Dan is a veteran of SmartMoney, MarketWatch, CBS MoneyWatch, InvestorPlace and DailyFinance. He has written for The Wall Street Journal, Bloomberg, Consumer Reports, Senior Executive and Boston magazine, and his stories have appeared in the New York Daily News, the San Jose Mercury News and Investor's Business Daily, among other publications. As a senior writer at AOL's DailyFinance, Dan reported market news from the floor of the New York Stock Exchange and hosted a weekly video segment on equities.
Once upon a time – before his days as a financial reporter and assistant financial editor at legendary fashion trade paper Women's Wear Daily – Dan worked for Spy magazine, scribbled away at Time Inc. and contributed to Maxim magazine back when lad mags were a thing. He's also written for Esquire magazine's Dubious Achievements Awards.
In his current role at Kiplinger, Dan writes about equities, fixed income, currencies, commodities, funds, macroeconomics, demographics, real estate, cost of living indexes and more.
Dan holds a bachelor's degree from Oberlin College and a master's degree from Columbia University.
Disclosure: Dan does not trade stocks or other securities. Rather, he dollar-cost averages into cheap funds and index funds and holds them forever in tax-advantaged accounts.
-
Target Limits Self-Checkout To 10 Items
Target launches new self-checkout lanes on heels of a new paid membership plan and expanded brand offerings.
By Jamie Feldman Published
-
Should You Invest in CDs? What to Consider
Before putting your money in a certificate of deposit (CD), you should know why banks issue them, how they are used and how they are priced.
By Brian Skrobonja, Chartered Financial Consultant (ChFC®) Published
-
How To Find the Best Japanese Stocks
Japan's stock market is soaring which has many investors wondering how to find the best Japanese stocks. We take a closer look here.
By Kyle Woodley Published
-
Stock Market Today: Stocks Close Lower as Tech Shares Slump
Weakness in several Magnificent 7 stocks created headwinds for the main indexes Friday.
By Karee Venema Published
-
Stock Market Today: Stocks Swing Lower as Chipmakers Slump
The main indexes erased an early lead Thursday as several semiconductor stocks sold off.
By Karee Venema Published
-
Why These Homebuilders' Stock Buybacks Are Important for Investors
Strong housing demand makes homebuilders an ideal long-term investment. The fact that these four are actively buying back their stock only sweetens the pot.
By Louis Navellier Published
-
Stock Market Today: Stocks End Mixed Ahead of Retail Sales, PPI
Stocks took a breather Wednesday as investors looked ahead to tomorrow's inflation data.
By Karee Venema Published
-
Stock Market Today: S&P 500 Nabs New Record Close After February CPI
Strong gains for Oracle and Nvidia helped the main indexes brush off hotter-than-anticipated inflation data.
By Karee Venema Published
-
February CPI Report: What the Experts Are Saying About Inflation
CPI Another hotter-than-expected CPI report muddies the timing for the first interest rate cut.
By Dan Burrows Published
-
9 Tips to Successfully Rent Out Your Home
Many people don't want to sell homes with low mortgages, so a more attractive option is renting. There are many steps to make renting out your home work.
By Daniel Bortz Published