New York Community Bancorp Inc. (NYSE: NYCB) shares plummeted more than 37% on January 31 after the regional lender reported an unexpected loss of $260 million in the fourth quarter. The bank cited bad loans for commercial real estate, specifically apartment buildings and offices, resulting in a loss of 27 cents per share in the quarter. Analysts had anticipated earnings of 29 cents per share.
The bank also slashed its dividend by 70% and named a new executive chairman. The New York Community Bancorp dividend yield currently stands at 16.23%, but that’s a case of the yield rising as the stock of a troubled company is cratering.
The SPDR S&P Regional Banking ETF (NYSEARCA: KRE), which tracks the index of the same name, also gapped down on the New York Community Bancorp news as pessimism spread throughout the industry. That ETF is down 5.73% in the past week.
New York Community Bancorp quickly scheduled a call with investors in an effort to stem the bleeding, but it appears to have been unsuccessful. Adding to the pain, bond rater Moody’s downgraded the bank’s long-term debt ratings to junk status.
This downturn in regional banking differs from last year’s in that it’s driven by commercial real estate defaults. Treasury Secretary Janet Yellen, speaking at a Congressional committee hearing recently, said she was concerned about regional banks, adding that regulators are working with the banks to make sure “loan loss reserves are built up to cover losses” and “dividend policies are appropriate.”
Regional banks continue to rely heavily on commercial mortgages, with substantial portions of their loan portfolios locked up in real estate such as office buildings, apartment buildings, malls, and hotels. These loans may become increasingly risky as more employees work from home, instead of commuting to an office building, which could lead to more defaults, with regional banks holding the bag.
As of now, it doesn’t look promising for big investors to swoop in and pick up bargains in the regional banking sector. The New York Community Bancorp analyst ratings show a consensus of “reduce,” something you don’t see very often.
With investors, regulators, and bond raters watching the industry very closely, it’s wise to be wary of this part of the banking industry. Large-cap bank stocks, however, have very different business models and multiple streams of income, immunizing them from this particular problem of real-estate portfolio defaults.
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