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Regional-Bank Stocks Dragged Down by Troubled New York Community Bank

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Recent troubles faced by New York Community Bank (NYCB) have negatively impacted regional-bank stocks. However, despite this, bondholders remain confident in NYCB’s ability to resolve its issues and view them as isolated incidents.

Last week, NYCB’s sole traded bond experienced a significant drop in value, mirroring the decline of the bank’s stock. The surprise quarterly loss and disclosure of problems with commercial real-estate loans prompted investors to sell off their holdings. Additionally, NYCB reduced its dividend to bolster capital in compliance with regulatory requirements.

As a result, the bank’s stock has plummeted nearly 60% year-to-date, leading Moody’s Investors Service to downgrade its credit rating to junk status. Currently, NYCB’s bonds are trading at around 75 cents on the dollar.

D.A. Davidson recently downgraded NYCB’s stock from buy to neutral and expressed concerns about its detachment from fundamental factors affecting its value. Analyst Peter Winter, after the downgrade, revised his price target for the stock from $8.50 to $5. Winter also highlighted NYCB’s disclosure of increased deposits and plans to hire a new chief risk officer in the near future.

The departure of both the bank’s chief risk officer and main audit executive has left stakeholders unsettled, as it recalls the collapse of Silicon Valley Bank in March 2023. The absence of a chief risk officer at that time resulted in a run on deposits and turmoil in the regional-bank sector.

In the fourth quarter, NYCB raised its loan-loss reserves by a staggering 790%, amounting to $490 million. While other regional banks also made substantial increases, NYCB recorded the highest adjustment.

The chart below, provided by data-solutions provider BondCliQ Media Services, illustrates the performance of select community-bank bonds over the past two weeks. Notably, NYCB’s floating-rate notes maturing in 2028 experienced the most significant decline.

New York Community Bancorp Considers Sale of Rent-Regulated Commercial Real Estate

The recent surprise quarterly loss of New York Community Bancorp (NYCB) has prompted the bank to explore a potential sale of its rent-regulated commercial real estate. This development has led to a rise of about 5 basis points in the bonds associated with NYCB, as indicated by the chart.

Another noteworthy bank in this context is Valley National Bancorp (VLY), whose 3.0% notes maturing in June 2031 have fallen to 78 cents on the dollar. Operating as Valley Bank, this regional lender is based in Morristown, N.J., and boasts approximately $61 billion in assets.

Interestingly, while NYCB’s bond sales have escalated, the bonds of other small lenders have remained stable, as illustrated by the chart. These include Western Alliance Bancorp (WAL), a Phoenix-based lender with $70.9 billion in assets as of Dec. 31; Zions Bancorp N.A. (ZION), a Salt Lake City-based bank with $87.2 billion in assets; First National Bank of Pennsylvania (FNB), a Pittsburgh-based lender traded as F.N.B. Corp., with $34.74 billion in assets; and Webster Financial Corp. (WBS), a Stamford, Conn.-based lender with $74.95 billion in assets.

Surprisingly, despite the unfolding drama at NYCB, these bonds have experienced net buying over the past two weeks. A market source suggests that the bond market views this situation as an isolated problem and does not foresee any contagion.

In light of these developments, the SPDR S&P Regional Banking ETF (KRE), an exchange-traded fund monitoring the sector, recorded a 0.3% decline on Thursday and has seen an 11% drop year-to-date. In contrast, the S&P 500 (SPX) has gained 4.6%.

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