Regional banks in the U.S. are facing ongoing challenges, with difficulties including low dividend yields and stagnant stock performance. These banks have struggled in the market for many years and are considered risky investments. The recent concern...
Regional banks in the U.S. are experiencing ongoing difficulties that extend beyond concerns about high interest rates and commercial real estate, according to a recent note from DataTrek Research.
Nicholas Colas, co-founder of DataTrek Research, notes that regional banks have struggled in the market for many years. With dividend yields well below 10-year Treasuries, they are seen as highly risky investments.
The lackluster performance of regional banks can be observed in their aggregate dividend payouts, which have shown minimal growth since 2006-2007. Even before the recent concerns surrounding interest rates and exposure to the commercial real estate market, these banks faced challenges stemming from their long-term fundamentals.
Data from the SPDR S&P Regional Banking ETF reveals that the annual dividend per share decreased from $1.44 in 2006-2007 to $1.29 in 2019. Although it experienced a slight increase to $1.57 per share in 2023, this level is only 9% higher than the levels seen over a decade ago.
As a result, the stock performance of regional banks has remained stagnant compared to years past. Colas emphasizes that this sector has a history of generating limited shareholder value.
At present, shares of the SPDR S&P Regional Banking ETF (KRE) have declined 1.3% on Tuesday afternoon, contributing to a year-to-date slide of approximately 10%, according to FactSet data.
# Regional Banks Face Uncertainty amid Market Volatility
Shares of New York Community Bancorp Inc. (NYCB) have been on a downward spiral, raising concerns among investors. The recent slump can be attributed to worries over the bank's exposure to the commercial real estate sector, which has been experiencing significant challenges.
The bank's unexpected loss announcement last week only added to the growing unease. According to Oppenheimer analyst, the small, regional bank business model appears to be fundamentally flawed, further exacerbating concerns surrounding New York Community Bancorp's stock performance.
To compound matters, U.S. regulators have also highlighted commercial real estate as a top threat to the financial system by 2024. This warning has put additional pressure on regional banks, causing experts like Colas to advise caution when dealing with them. According to Colas, the group's valuations could potentially decline further, making them an even riskier investment.
Despite the mixed performance in the broader U.S. stock market, with the Dow Jones Industrial Average (DJIA) experiencing a modest rise of 0.3% while the S&P 500 (SPX) saw a slight slip of less than 0.1% and the Nasdaq Composite (COMP) dropped 0.3%, New York Community Bancorp's struggles have not gone unnoticed.
As for the financial sector of the S&P 500, it remained relatively unchanged on Tuesday afternoon trading, with a modest gain of 2.8% year-to-date.
In the bond market, the yield on the 10-year Treasury note (BX:TMUBMUSD10Y) declined seven basis points and is currently sitting at approximately 4.09%.
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