Wall Street hasn't been sure what to think about what's been happening in the banking sector. On one hand, bank failures of this size haven't happened since the financial crisis in 2008, and that was a tumultuous time full of fear about whether the global financial system could withstand the shock. Things don't seem as bad right now, but problems in Europe have nevertheless made some market participants less than pleased with what's been happening. Stock index futures were largely flat Monday, with the S&P 500 (^GSPC -0.88%) poised to pick up a point or two based on futures contracts.
You can see some of the uncertainty in the fact that even bank stocks aren't all behaving the same. First Republic Bank (FRCB) continued to lose ground as the Wall Street community had further concerns about the bank's rescue last week. However, New York Community Bancorp (NYCB) shares actually moved higher on news that might come as a surprise to some investors. Read on to learn more about why there are some disparities in stock performance within the banking sector.
First Republic gets its credit rating dinged
First Republic saw its stock fall another 17% in premarket trading on Monday. That followed a 33% decline on Friday, and the further descent came as investors reacted to the latest news about the beleaguered banking institution.
Over the weekend, credit rating agency S&P downgraded its rating on First Republic debt. The move took S&P's rating from BB+ to B+, a rare downgrade of three full notches. First Republic's long-term credit rating had already been considered to be below investment grade, making its debt securities more commonly known as junk bonds. However, the rating cut took First Republic further into junk territory, potentially raising its borrowing costs going forward.
S&P was dubious about the long-term impact of the rescue plan among nearly a dozen major banks to infuse First Republic with $30 billion in deposits. Despite resolving short-term liquidity issues, the move won't necessarily address other problems that First Republic faces, most notably the losses from investments that the bank has made that have taken a big hit in the past year.
Regional banks are likely to remain under pressure for a while as investors parse everything happening in the sector. Moreover, with the Federal Reserve planning to meet in the near future, many investors wonder whether the central bank will keep hiking interest rates or will choose to pause in light of the stresses to the financial system that its rapid pace of monetary policy tightening has caused.
A huge boost for New York Community Bancorp
Moving the other way, shares of New York Community Bancorp soared, climbing nearly 30% in premarket trading. The Hicksville-based parent company of Flagstar Bank has attracted the attention of Wall Street analysts because of a savvy move that it made.
New York Community Bancorp announced that Flagstar had entered into a deal with the Federal Deposit Insurance Corp. and the banking institution set up to handle the transition of Signature Bank (SBNY). Under the terms of the deal, Flagstar purchased assets of $38 billion, including $25 billion in cash and $13 billion in loans, offered at a $2.7 billion discount to net asset value. In exchange, Flagstar assumed liabilities of $36 billion, including $34 billion in deposits. Flagstar will work further to reach an agreement on Signature's commercial and multifamily real estate loans, and it also will get the rights to Signature's wealth management and broker-dealer businesses.
Wall Street analysts loved the move. Wedbush upgraded New York Community Bancorp shares from neutral to outperform, arguing that the deal was opportunistic and could bolster the stock's long-term prospects. It's also positive for Signature customers, as Flagstar will start operating Signature's branches today.
Investors can expect to see winners and losers from the current banking crisis. That doesn't mean that things will work out well for everyone, but it does warrant watching as the process moves forward.
