7 Regional Bank Stocks Feeling the Heat as Rate Cut Hopes Dim

Stocks to sell

Regional bank stocks zoomed higher in late 2023, in anticipation of interest rate cuts in 2024. So far this year, however, there have been more indications that the Federal Reserve’s “higher for longer” stance on interest rates will persist.

While initially having a positive impact on net interest margin, in more recent months, high rates have turned from friend to foe. High interest rates have “done their job,” so to speak, when it comes to inflation, by lowering demand.

However, with borrowing demand falling, while interest rates on deposits have been rising, has put the squeeze on regional banks. Hence, “higher for longer” bodes badly for the sector.

Regional banks are also facing challenges like high exposure to commercial real estate and loans on rent-regulated multifamily properties.

Each of the following seven regional bank stocks is experiencing the fallout from the macro developments discussed above. Keep this in mind, before hastily going contrarian on this headwind-laden sector.

Bank of Hawaii (BOH)

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Bank of Hawaii (NYSE:BOH) is a prime example of a regional bank hurt by the impact of current interest rate/loan demand trends on the net interest margin. Over the past few fiscal quarters, BOH’s net interest margins have fallen considerably.

For instance, during the quarter ending Dec. 31, 2023, net interest margin came in at $115.8 million. This represented a 17.7% decline from the net interest margin figure reported during the prior year’s quarter ($140.7 million). However, it’s not so much this headwind, but others that are the reason the short side of the trade with BOH stock has remained crowded (15.3% of float sold short).

Although short interest has decreased since last July (when BOH was the most heavily-shorted bank stock), concerns remain about potential further loan losses stemming from the bank’s portfolio of loans made prior to the Fed’s rate hikes.

Columbia Banking System (COLB)

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The impact of “higher for longer” has for the most part had a slow-but-steady impact on regional bank stocks. However, with Columbia Banking System (NASDAQ:COLB), this factor led to a severe, sudden plunge in price for shares late last month.

Back on Jan. 25, COLB stock fell by 21.14%. As InvestorPlace’s William White reported that same day, this was because of the market’s negative reaction to the Tacoma, Washington-based bank’s latest quarterly results.

Earnings came in well below forecasts. Columbia’s updates to guidance suggest that issues like declining net interest margins will continue through the year.

Since its big post-earnings dive, COLB has continued to slide lower. While the stock has as a result moved to a much lower valuation (7.9 times forward earnings), until news/developments emerge that suggest trends are becoming more favorable, Columbia Banking System could keep performing poorly.

KeyCorp (KEY)

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Admittedly, KeyCorp (NYSE:KEY) has held up relatively well compared to the regional banking plays discussed above and below.

However, while shares in this Cleveland, Ohio-based regional banking giant haven’t cratered like some other names in the space, this doesn’t mean it is fully immune from the impact of this industry-wide headwind.

Even as KeyCorp (as discussed in its latest earnings release) has stabilized its net interest margins, the bank did also provide soft guidance regarding future earnings growth. How could this negatively affect KEY stock in the future?

With KEY trading at the higher end of the bank stock valuation range (nearly 12 times forward earnings), further disappointment in the coming quarters could lead to a de-rating for shares.

KeyCorp has a fairly high forward dividend yield (5.83%), but valuation-related price declines could outweigh the upside from KEY’s payouts.

New York Community Bancorp (NYCB)

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Previously, I’ve lauded New York Community Bancorp (NYSE:NYCB), for two reasons. First, the New York-based regional bank’s low valuation. Second, the potential for cost/growth synergies resulting from its merger with Flagstar Bancorp, which closed last year.

Unfortunately, instead of being a profitable value investment, NYCB stock has wound up being a value trap.

With loan losses surging, as high rates and rent regulations affect the value of its portfolio of multifamily loans, NYCB has become one of the imperiled regional bank stocks.

NYCB shares have tanked considerably, as the bank scrambles to raise capital and mitigate the further impact of this key risk on its financial health.

While some (including company insiders) may wager that the market has overreacted, it may be best to tread carefully. Even if a Silicon Valley Bank-style “game over” moment is unlikely, NYCB could stay under pressure for quite some time.

Sandy Spring Bancorp (SASR)

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Sandy Spring Bancorp (NASDAQ:SASR) is another regional banking name I’ve been bullish on in the past, even as the impact of high interest rates had a negative impact on analyst/investor sentiment for shares.

Back in October, I argued that, with shares in this Washington, D.C.-area regional bank (based in Olney, Maryland) trading at a large discount to book value, interest rate headwinds were more than accounted for. Initially, my thesis was playing out. Late last year, SASR rallied in tandem with other stocks in the regional banking sector.

Since then, though, SASR has pulled back, and shares are again trading at a sharp discount to book. With high deposit rates/soft borrowing demand still affecting profitability, it may be awhile before SASR climbs back up towards its book value ($35.36 per share, versus a trading price of $22.68 per share).

Valley National Bancorp (VLY)

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The aforementioned upheaval with NYCB has spilled over to other regional banking stocks, most notably Valley National Bancorp (NASDAQ:VLY).

As Valley National is also based in the New York metropolitan area, investors are concerned about its potential exposure to problematic office and multifamily loans.

This specific factor, which has led to a double-digit dip for VLY stock, comes just as net interest margins keep getting squeezed lower, as seen in the bank’s latest quarterly results. So, is the market on the money bailing on the stock, or is there good reason to be careful/stay away for now?

Although much suggests that Valley National isn’t the next NYCB, I’d err on the side of caution, and go with the latter rather than the former. As analysts argue that increased loan-loss provisions and charge-offs are likely, a rapid rebound for Valley National shares may not be in the cards.

Zions Bancorporation (ZION)

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Zions Bancorporation (NASDAQ:ZION) is another of the larger regional banks, with a presence in not just its home state of Utah, but across many West Coast states, in the inter-mountain West, and in the American Southwest.

As seen in the bank’s three most recent quarterly earnings results, net interest income has stabilized. Yet if “high for longer” remains the situation with interest rates far longer into this year than expected last year, ZION stock is a regional banking stock that could treading water, as it’s done since rallying last December.

Worse yet, shares could again come under pressure. At least, it worries about the health of the commercial real estate space spike again. Zions continues to be a regional bank with a notably higher level of exposure to office building loans. Taking all of this into account, it may best to stay away from ZION shares.

On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.