By: Opulence Wealth Management
It was nearly a year ago when global capital markets came under sudden and intense pressure. Over the course of hours in March 2023, Silicon Valley Bank evaporated into insolvency. In the subsequent days, New York based Signature Bank and Swiss banking giant Credit Suisse followed into the abyss, and global investors found themselves having Great Financial Crisis flashbacks as they spent two consecutive weekends waiting with bated breath for a government resolution to prevent another major banking contagion. So as financial headlines start to gather around New York Community Bank (NYCB), it is reasonable to wonder whether we are going to see déjà vu all over again in early 2024.
What happened? The latest episode of banking suspense got underway last Wednesday, January 31, when New York Community Bank, the 35th largest bank in the U.S. with $116 billion in total assets, announced their latest quarterly results. This included an unexpected net quarterly loss of $252 million, a major dividend cut, and more than $550 million set aside for loan loss provisions against anticipated weakness in office properties and rent stabilized apartments. Needless to say, investors were not thrilled with the news, as shares of NYCB have endured a -65% peak-to-trough plunge in the February days since.
Not only has the NYCB situation rekindled rumbling concerns about the state of the U.S. commercial real estate market, but as an added twist, investors were reminded that Flagstar Bank, a wholly owned subsidiary of New York Community Bank, was the acquirer of Signature Bank depositors from last year.
What now. While developments with New York Community Bank are eerily reminiscent of what took place last March, the market response thus far has been decidedly different.
First, the major market indices are effectively unmoved by the situation. The headline benchmark S&P 500 continues to trade at the high end of its range since the October 2022 lows and is on the brink of moving above the 5000 level for the first time in its history. And the safe haven 10-Year U.S. Treasury yield continues to hover near one month highs at 4.15%. This, of course, is in stark contrast to last March when the S&P 500 dropped by as much as -7% and the 10-Year Treasury yield fell by more than three-quarters of a percentage point as investors moved to safety.
Also, regional bank stocks as measured by the KBW Regional Banking Index have fallen by nearly -12% since the NYCB news broke, it is important to put this decline into context. Regional bank stocks had rallied by more than +40% since late October through the end of January, so although the recent plunge is noteworthy, regional bank stocks are still +21% higher versus where they were trading just over three months ago and have essentially fallen back to levels from early December. This is in sharp contrast to last March when regional bank stocks dropped by nearly -30% to levels last seen a few years earlier during the COVID outbreak in 2020.
What’s different? While the damage from the New York Community Bank news has been relatively muted thus far, it is a situation that remains worth watching closely in the days ahead as the situation unfolds. But a key factor is different today versus a year ago that is also likely bolstering investor confidence that what happens with NYCB will largely stay limited to NYCB and perhaps its most closely related peers. This is the expectation that the U.S. government including the Treasury and the Federal Reserve will intervene quickly and assertively if necessary with whatever policy support is needed in order to contain the situation and avoid it spreading to other financial institutions. This expectation, of course, is based on what took place last year, as massive policy intervention that eventually became coordinated globally not only stemmed the bleeding last March but also likely played a part in fueling the Artificial Intelligence mini-bubble that subsequently followed through last July thanks to all of the liquidity that was injected into the financial marketplace.
Bottom line. The unfolding situation with New York Community Bank warrants close attention in the days ahead. But developments so far suggest that the situation across the financial sector is likely to remain largely contained. And the more aggressive investors among us might even see opportunity associated with the recently measurable pullback in selected regional banking shares.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Investment advice offered through Great Valley Advisor Group (GVA), a Registered Investment Advisor. I am solely an investment advisor representative of Great Valley Advisor Group, and not affiliated with LPL Financial. Any opinions or views expressed by me are not those of LPL Financial. This is not intended to be used as tax or legal advice. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Please consult a tax or legal professional for specific information and advice.
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