Regional Bank ETFs Hurt by NYCB Troubles

The U.S. regional banking sector is back in the news for the wrong reasons, raising new questions about where or if ETFs such as the iShares Regional Banks ETF (IAT) and the SPDR S&P Regional Banking ETF (KRE) belong in investor portfolios. 

“Owning regional banks requires an abnormally high desire for pain,” said Yang Tang, co-founder of ETF issuer Arch Indices. 

Commenting on the unfolding problems at New York Community Bancorp, which this week lost nearly half its market value after marking down its commercial real estate portfolio, Tang said regional bank investors “have to hate themselves.” 

While analysts are not yet making a direct comparison between NYCB and the regional bank failures last March involving Silicon Valley Bank, First Republic and Signature Bank, NYCB is dealing with a similar assets-to-liabilities imbalance. 

“Part of the reason NYCB is having issues is they bought a large portion of Signature’s assets, and maybe they bit off more than they can chew and are now getting indigestion,” said Nick Codola, senior portfolio manager at investment management firm Brinker Capital Investments. 

“We’re in a very volatile period for regional banks, but I wouldn’t say this is the tip of the iceberg,” he added.  

Regional Bank ETFs Face Headwinds 

The fact that NYCB shares bounced back to gain about 8% in mid-day trading Friday suggests the shares were oversold earlier in the week, Codola said.  

The initial selloff of NYCB stock, which drove the price down more than 37% on Wednesday, was triggered by the bank announcing a dividend cut to five cents per share from 17 cents to improve the assets-to-liability ratio. 

“Maybe people are digesting the news and realizing things aren’t quite as dour as they thought,” Codola said.  

Regional bank ETFs KRE and IAT have also been bouncing around on the unfolding NYCB story. KRE is down more than 8% since Wednesday, and IAT is down more than 6%. 

“The news sent KRE down around 9% over two days, but the ETF remains far above its lows from last year during the height of the regional banking crisis,” said Sumit Roy, senior ETF analyst at etf.com. 

“Time will tell whether the commercial real estate issues that caused NYCB to plunge are isolated to the bank or whether they are a canary in the coal mine for the broader industry,” he added. 

Brinker Capital’s Codola said the issues facing NYCB, which is heavily exposed to the struggling New York commercial real estate market, are not representative of regional bank balance sheets across the country. 

“Regional banks is a space where you have to be very selective in certain areas,” he said. “I wouldn’t go out and buy an index of regional banks.” 

Alexander Yokum, senior equity analyst at investment research group CFRA, is also careful not to lump last year’s bank failures in with what’s facing NYCB. 

“Last year it was all about underwater securities portfolios, low yielding fixed-rate loans and deposit outflows,” he said.  

NYCB, which completed two acquisitions over the past year and was hitting the crucial $100 billion-assets threshold, suffered from growing too fast. 

“Banking is a different industry, and fast growth is not always a positive thing,” Yokum said. “I think NYCB faces a decently tough road because they will have to reduce their balance sheet and it will be a pretty challenging year.” 

Arch Indices’ Tang, meanwhile, is not convinced the problems with NYCB will end here. 

“NYCB management is claiming there is only one bad loan, but if they found one massive weakness in one loan, how do we know there are no more bad loans?” he said. “I don’t think NYCB will be around by the end of the year, and this will spread.” 

Contact Jeff Benjamin at [email protected] and find him on X at @BenjiWriter