(Bloomberg) -- The volatility that buffeted shares of regional banks this week minted big paper profits for short-sellers, reminiscent of their gains during last year’s tumult in the sector.

The lenders’ selloff produced mark-to-market gains of $1.1 billion for shorts across the two-day rout following New York Community Bancorp’s earnings on Wednesday, according to data from S3 Partners LLC. 

When NYCB dropped 45% across those two days following its earnings, that yielded $119 million in profits for shorts from that stock alone, according to S3 data. The shares tumbled after the bank’s quarterly report showed a surprise loss, a large jump in loan-loss provisions and a dividend cut, as the bank grappled with its commercial real estate exposure and the prospect of stiffer regulation because of its increased size. 

The short-sellers’ profits could have been even higher: For 11 straight sessions into that day, hedge funds unwound short positions in the most-traded regional banks, data from Goldman Sachs Group Inc.’s prime brokerage unit show. The bears had edged back from betting against the sector after it rallied since October.

Last year’s tumult in regional banks lured short-sellers, who sparked controversy as they scrutinized lenders’ balance sheets for weaknesses emanating from surging interest rates and wagered against the stocks. 

The sector turned into one of the chief bright spots for these traders in 2023, when the overall market rallied. First Republic Bank’s collapse made it the year’s most profitable short wager, generating paper profits of $1.6 billion, S3 data show.

Read more: Shorts Lost $195 Billion in 2023 Despite Wins on Regional Banks

Some investors and analysts saw this week’s slump as a buying opportunity. NYCB shares rose Friday, paring their weekly loss, and the regional bank index stabilized.

Hard Target

For short-sellers, the difficulty is that potential credit issues can be hard to target because they can materialize as sudden or one-off issues. 

NYCB drove home that challenge this week. Analysts pointed out, for example, that asset growth due to an acquisition last year shifted it into a different regulatory bucket, an issue that’s idiosyncratic to the firm. 

The economy’s resilience is also allaying some concerns around credit, even as real estate weakness has been a concern for regional banks.

“The economy’s been good,” said William C. Martin, who operates his family office, Raging Capital Ventures, and drew attention last year amid the collapse of Silicon Valley Bank because he’d voiced concern around the lender’s securities portfolio in the preceding months. “It just takes time. Cycles take time.”

Read more: The Balance-Sheet Time Bomb at SVB Was ‘Sitting in Plain Sight’

--With assistance from Lu Wang and Isabelle Lee.

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