By Despite a challenging week, New York Community Bancorp (NYCB) experienced a glimmer of hope as its stock rose by 17%, accompanied by strong trading volume.
Closing at $4.90 on Friday, the regional bank’s stock remained down by 18% for the week and over 50% since January 31. On that date, NYCB shocked shareholders by announcing a 70% reduction in its dividend and increasing its loan-loss reserves by half a billion dollars.
NYCB attributed its rise to the acquisition of Flagstar Bank in 2023 and the addition of assets from the failed Signature Bank. These developments have propelled NYCB into the category of banks with assets exceeding $100 billion. Consequently, the bank now faces more rigorous regulatory demands regarding liquidity and capital.
The significant increase in NYCB’s loan-loss allowance has reignited concerns in the market regarding regional banks’ exposure to commercial real estate loans.
As a Hicksville, N.Y. based lender, NYCB holds a comparatively high level of such loans, amounting to 60% of its loan book. Notably, 44% of its loans are tied to New York City’s rent-regulated apartment buildings. Executive Chairman Sandro DiNello assured investors in a call on Wednesday that plans are in place to reduce this exposure.
The challenges faced by NYCB have had a negative impact on regional bank stocks as a whole. The SPDR S&P Regional Banking ETF closed Friday 9% lower than its pre-January 31 levels.
In a comprehensive analysis of mid-cap banks, Morgan Stanley analyst Manan Gosalia concluded that it is premature to be optimistic about the sector. Despite regional banks now being valued at an average of just eight times his earnings estimates for 2025, Gosalia maintains a Neutral rating for most of them.
The Challenging Outlook for Midsize Banks
The Continued Struggle: Midsize Banks and Loan Problems
The tepid view of many industry experts regarding midsize banks stems from their belief that loan problems will persist throughout this year. According to a recent report, it could take several years for problem loans in commercial real estate to be effectively addressed. This becomes particularly significant considering that commercial real estate accounts for 22% of loans at typical midsize banks, in contrast to only 5% at the largest banks.
NYCB: A Mixed Outlook
NYCB, one of the banks under scrutiny, has received a Neutral rating. While it plans to accumulate significant cash and capital this year, there are concerns that the subsequent reduction in its loan book could impact earnings. However, if NYCB can resume loan growth in the future, it may pique the interest of industry observers.
A Glimpse of Hope: Banks Worth Considering
Although the majority of mid-cap banks may not capture attention until 2025, there are some exceptions. One such bank is Huntington Bancshares, which garners high praise from experts. This Ohio-based institution boasts the lowest exposure to commercial real estate among the stocks covered, complemented by ample reserves against such loans. It is projected that Huntington Bancshares could achieve an earning of $1.35 per share by 2025, propelling its stock from the current price of $12.41 to $16.
Furthermore, other regional banks that are highly recommended include:
- East West Bancorp: A California lender that has established a niche franchise within the Asian American Community.
- Webster Financial: A Connecticut-based firm that benefits from a cost-efficient source of funds in its Health Savings Account business.
- M&T Bank: Based in Buffalo, N.Y., M&T Bank boasts robust levels of cash and capital.
These banks have garnered positive attention due to their unique strengths and strategic positioning.
Looking Ahead: Volatility and Investor Sentiment
According to industry analyst Gosalia, more volatility can be expected within the banking sector as investor sentiment oscillates between near-term credit risk and the promise of a stronger future by 2025. It is crucial for market participants to carefully navigate this uncertain terrain.
In conclusion, midsize banks currently face various challenges and uncertainties. However, amidst these trials, opportunities arise for astute investors to identify underlying potential for growth.
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