U.S. regional bank shares were under the lens again on Thursday after the sector's main benchmark experienced its biggest single day decline since the collapse of Signature Bank in March last year.
The KBW Regional Banking Index (.KRX) fell 6% on Wednesday, dragged down by New York Community Bank (NYCB) (NYCB.N), which experienced a record single-day drop of 37.6%, according to LSEG data. The Federal Reserve's decision to hold interest rates steady on Wednesday also weighed on the broader market.
The sell-off rekindled investor fears over the health of regional lenders, even as many analysts and investors said the problems at NYCB, which slashed its dividend 70% and posted a surprise loss, were mostly unique to its balance sheet.
NYCB shares inched up 2.3% before the bell on Thursday. The lender, which bought some of Signature Bank's assets last year, has said it was building capital to bolster its balance sheet.
The Signature Bank purchases, along with its 2022 acquisition of Flagstar Bank, pushed NYCB's balance sheet above a $100 billion regulatory threshold that is subject to stricter capital and liquidity requirements.
It had assets of $116.3 billion as of December, compared to $90.1 billion in December 2022. Its balance sheet has increased by nearly 30% in one year, according to NYCB's own data.
"We believe NYCB has several idiosyncratic characteristics, but the result and reaction are reminders of risks that remain in the regional banking space," wrote Jefferies analysts.
Deposits have stabilized since last year's upheaval, but some investors and analysts have warned the cost of retaining those deposits would squeeze regional lenders' net interest income (NII), the difference between what lenders pay on deposits and earn on loans.
During first-quarter earnings, many regional banks have warned that NII, which drives lending profits, is waning.
NYCB sees NII in 2024 between $2.8 billion and $2.9 billion, while analysts were expecting $2.88 billion.
"Many investors have looked for the regional bank index to continue its recovery in 2024," said Rick Meckler, partner at Cherry Lane Investments, adding Wednesday's moves were a suggested that it may not be a straight line recovery.
"Individual regional banks will need to begin to show more positive results in what investor presume will be a non-recessionary and lower interest rate environment," Meckler added.
