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.
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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.
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