By Niket Nishant and Nupur Anand

(Reuters) -Regional U.S. financial institution shares sank on Wednesday, dragged by a 37.6% plunge within the shares of New York Neighborhood Bancorp (NYSE:) after it lower its dividend and posted a shock loss, renewing fears over the well being of comparable lenders.

The KBW Regional Banking Index closed down 6%, its largest one-day drop since March 13 final yr after New York’s Signature Financial institution (OTC:) collapsed amid depositor panic sparked by the failure days earlier of Silicon Valley Financial institution.

Deposits have since stabilized, however some buyers mentioned Wednesday’s sell-off highlighted ongoing considerations over regional lenders’ well being, together with that the price of retaining deposits would squeeze internet curiosity revenue (NII) which drives lending income.

“The sector on the whole is topic to extra of an emotional commerce just because depositors might be spooked into feeling just like the collapse is imminent. However increased rates of interest have been sporting on earnings and NII for lots of those banks,” mentioned Brian Mulberry, consumer portfolio supervisor at Zacks Funding Administration.

The sell-off appeared to catch the market without warning.

Merchants in choices backed by SPDR S&P regional financial institution change traded fund had been positioned with a bullish bias, particularly for the close to time period, Commerce Alert knowledge confirmed.

On Wednesday, these choices traded at 4 occasions their regular tempo as buyers positioned for a extra gloomy outlook. Put choices, sometimes purchased to specific a bearish or defensive view, outnumbered calls, typically a bullish play, 3-to-1.

“Many merchants imagine that warnings of the kind we noticed from NYCB are like cockroaches – if you happen to see one, there should be extra hiding simply out of sight,” mentioned Steve Sosnick, chief strategist at Interactive Brokers (NASDAQ:).

Investor jitters have been amplified on Wednesday because the Federal Reserve left rates of interest unchanged. Excessive charges geared toward taming inflation have weighed on regional financial institution mortgage income, in addition to the worth of securities they maintain.

“The market can be repricing the primary charge lower away from March and into Might, creating one other 5 months of paying 5%+ to depositors whereas mortgage demand is weakening,” mentioned Mulberry.

Shares of Valley Nationwide Bancorp (NASDAQ:), Residents Monetary (NYSE:) Group, and Areas Monetary Corp (NYSE:) fell between 4% and seven.8%.

Different analysts and buyers, although, mentioned NYCB’s issues have been principally idiosyncratic to its stability sheet and that financial institution shares weren’t seeing the kind of stress seen in March final yr.

“I do not assume what we noticed within the regional banking house in final March is anyplace on the playing cards proper now,” mentioned David Smith, a financial institution analyst at Autonomous Analysis.

REGULATORY THRESHOLD

NYCB’s shares fell as a lot as 46% in morning buying and selling, however later pared losses.

The financial institution, which purchased a few of Signature Financial institution’s belongings final yr, mentioned it was chopping its dividend by 70% and constructing capital to bolster its stability sheet.

The Signature Financial institution purchases, together with its 2022 acquisition of Flagstar Financial institution, pushed NYCB’s stability sheet above a $100 billion regulatory threshold that’s topic to stricter capital and liquidity necessities. It had belongings of $116.3 billion as of December.

“We crossed this necessary threshold before anticipated on account of the Signature transaction,” New York Neighborhood Bancorp (NASDAQ:) CEO Thomas Cangemi mentioned in a press release.

The shares of some banks slightly below the $100 billion threshold additionally fell. Zions, with $87 billion, was down practically 5.7%, and Comerica (NYSE:), with $85 billion, was down 5.4%.

Ken Usdin, an analyst at Jefferies, mentioned in a analysis observe that crossing the $100 billion threshold is “a reminder for banks to prepare.” Usdin famous that Comerica and Zion “had already gone by means of a rigorous ramp-up of infrastructure for stress testing and different necessities.”

NYCB analysts, too, gave the impression to be caught off guard, and at occasions appeared pissed off with the financial institution’s administration for offering insufficient particulars, together with on its NII forecast.

NYCB posted an adjusted lack of $185 million as a consequence of a chunky $552 million provision for credit score losses. The lion’s share of these provisions was allotted to its business actual property portfolio which, as with many lenders, has been underneath stress amid lingering pandemic workplace vacancies.

“It is messy for the shareholders however there’s no spillover. It’s comparatively small,” mentioned Edward Al-Hussainy, senior rate of interest and forex analyst at Columbia Threadneedle Investments.