Investors punish US banks with credit quality, funding cost woes in Q4 2023

Investors punished US banks with credit quality and funding cost woes in the fourth quarter of 2023.

The KBW Nasdaq Bank index stayed relatively stable as US banks reported earnings between Jan. 12 and Feb. 2, dropping just 0.4%. However, some individual banks experienced large moves during that period, either up or down, as Wall Street harshly judged fourth-quarter 2023 earnings results, specifically around credit quality and net interest income and net interest margin trends.

Largest 1-day drops

New York Community Bancorp Inc. experienced the greatest stock price pressure during the fourth-quarter 2023 earnings season. The company reported a net loss after recording a heavy credit expense against its commercial real estate (CRE) portfolio and large liquidity build to prepare to meet large bank regulatory standards.

New York Community's credit provision rose nearly 9x quarter over quarter following a deep dive into its CRE portfolio. The company's net interest margin (NIM) also came under pressure after it added billions in cash and wholesale borrowings to build its liquidity base in response to surpassing $100 billion in assets with its acquisitions of Flagstar Bancorp Inc. and most of the failed Signature Bank.

The company's stock price has continued to face pressure, closing down 56.8% on Feb. 7 from its price prior to reporting earnings.

Equity analysts think the reaction is overblown.

"While we have been wrong on the stock and surprised by the announcement, we think the overreaction is overdone," Piper Sandler analyst Mark Fitzgibbon wrote in a Jan. 31 note.

"While the road could be bumpy, we remain constructive on the name," Fitzgibbon reiterated in a Feb. 6 note, expressing hope that the company "can put these issues in the rearview mirror, appease regulators and commence rebuilding its earnings power."

Columbia Banking System Inc. also experienced outsized stock price pressure after disappointing guidance and a funding cost spike plagued its fourth-quarter 2023 earnings.

The Tacoma, Wash.-based company's stock price plunged 21.1% after its cost of interest-bearing liabilities jumped 30 basis points sequentially, and the bank guided to further funding cost pressure ahead. Columbia's NIM ended the year at 3.78%, and the company guided to a NIM between 3.50% and 3.60% in 2024.

The company also continued to experience credit losses related to its exposure to the trucking industry.

"Forward hope on NIM stability, above peer loan growth, iron clad credit quality and attractive capital return was dashed," D.A. Davidson analyst Jeff Rulis wrote in a note downgrading the company's stock rating to "neutral" from "buy" following the results.

Wells Fargo analyst Timur Braziler predicted the company's net interest income (NII) will not inflect until the first quarter of 2025, the latest among companies the team covers.

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Largest 1-day gains

After facing pressure throughout 2023 as a result of regulatory woes, Blue Ridge Bankshares Inc.'s stock price recovered some after it reported fourth-quarter 2023 earnings. The bank posted the highest stock price return after announcing earnings, with its stock rising 9.6%.

Lakeland Financial Corp.'s stock price jumped 9.2% after its earnings results exceeded analyst expectations, including "unexpected" NIM expansion, Stephens analyst Terry McEvoy wrote in a note. The company's NIM stood at 3.25% in the last quarter of 2023, up 1 basis point quarter over quarter, according to S&P Global Market Intelligence data.

First Internet Bancorp's stock price also rose after it reported favorable NIM and NII trends. The company's NIM expanded 19 basis points quarter over quarter, giving way to NIM and NII growth expectations in 2024, Piper Sandler analyst Nathan Race wrote in a note.