US Regional Banking Index Down 9% YTD Amid Worries of Crisis

On Thursday, U.S. regional bank shares continued declining, compounding the previous day’s losses triggered by New York Community Bancorp’s (NYSE: NYCB) unexpected decision to reduce its dividend. The bearish sentiment sent the regional banking index tumbling over 9% year-to-date and reignited concerns that the banking crisis is far from over.

US Regional Banking Crisis Likely Not Over

The bank’s stock fell an additional 8.5% Thursday, reaching $5.92, although it had recovered slightly from more significant drops earlier in the day. The bank had suffered a record one-day decline of 37.6% earlier.

The downturn was set off after the bank took the market by surprise by cutting its dividend, reporting a quarterly loss, and increasing its provisions for loan losses. These developments heightened worries about the banking sector’s vulnerability to commercial real estate.

However, NYCB’s struggles are also partly due to the need for stronger regulatory compliance following its acquisition of a portion of the failed Signature Bank last year, which moved its assets into a higher regulatory bracket.

In turn, credit ratings company Moody’s placed NYCB on review for a downgrade, a move that could push the bank into the “junk” territory. Furthermore, Morgan Stanley said it is reevaluating its earnings projections for the NYCB. At the same time, other financial institutions, including Bank of America and UBS, have lowered their price targets for the bank’s stock.

The negative sentiment spilled into the broader sector, sending the KBW Regional Banking Index down 2.3% Thursday. The index is currently down 9% year-to-date.

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Banks to Remain Under Pressure as Early Rate Cuts Seem Unlikely

This week’s turmoil in the banking sector has reignited concerns that the crisis, which wreaked havoc last year, is still unresolved.

In other words, the NYCB’s earnings and dividend cut announcement served as a wake-up call for investors who had underestimated the sector’s vulnerability to the Federal Reserve’s elevated interest rates roughly a year following the failure of two banks.

Furthermore, the banks’ commercial real estate (CRE) portfolios and lending margins will likely remain under pressure considering that the Fed will unlikely introduce the first rate cut before May. At the latest policy meeting, the US central bank left the door open for policy rate reductions, but a move in March would likely come too early.

The Fed said the March cut is unlikely, but if the ongoing banking crisis continues, do you think the policymakers may reconsider? Let us know in the comments below.

Disclaimer: The author does not hold or have a position in any securities discussed in the article.