New York Community Bancorp (NYCB) saw its stock plunge over 40% this week after the bank reported an unexpected net loss in the fourth quarter of 2023 and slashed its dividend by over 70%. The turmoil has raised concerns about the health of regional banks in the U.S. and cast doubt on the prospects for further consolidation in the sector.
Shock Loss and Massive Dividend Cut Rattle Investors
On Tuesday, NYCB stunned investors when it said it swung to a $364 million net loss in the fourth quarter, compared to a $100 million profit a year earlier. The loss was driven by a sharp increase in provisions for credit losses as the bank built reserves in anticipation of a recession.
In addition, NYCB slashed its quarterly dividend by 71% to $0.17 per share. The bank said it needed to preserve capital to guard against potential loan losses.
The shock developments sent NYCB’s stock plunging as much as 42% on Wednesday in its biggest one-day drop since going public in 1993. The stock slide vaporized over $4 billion of NYCB’s market value.
Downgrades Pour In, Raising Concerns about Viability
In the aftermath of NYCB’s ugly results, analysts rushed to downgrade the stock and slash price targets.
RBC Capital cut its rating to Sector Perform from Outperform and halved its target to $8. Wells Fargo double downgraded NYCB to Underweight from Overweight.
Analysts warned that NYCB faces considerable uncertainty regarding the quality of its multifamily loans in the New York City area. With a potential wave of defaults looming, there are worries whether NYCB has the financial strength to ride out a prolonged downturn.
Regional Bank Stocks Hammered on Recession Fears
The turmoil at NYCB also dragged down shares of other regional lenders this week, stoking wider concerns about the banking sector.
The S&P Regional Banking ETF plunged over 12% since NYCB’s earnings report, marking its worst two-day stretch since June 2020. Meanwhile, the broader Financial Select Sector SPDR Fund has fallen 5%.
Behind the selling pressure is mounting fears of a recession later this year that could lead to pronounced loan losses for banks. Rate-sensitive regional lenders look especially vulnerable given their focus on real estate and commercial lending.
M&A Outlook Clouded After Growth Strategy Backfires
In recent years, NYCB has been one of the most acquisitive banks in the U.S. as it strived to bulk up in size and become a dominant lender in the New York market.
But the bank’s growth-by-acquisition strategy has now backfired badly, raising doubts about the wisdom behind the regional bank M&A surge.
In particular, NYCB’s disastrous purchase of failed lender Flagstar, which closed just last year, has blown up spectacularly. By swallowing Flagstar, NYCB quadrupled its exposure to multifamily lending right before the bottom fell out.
The fallout at NYCB will likely put a chill on future regional bank tie-ups. Investors are signaling they want to see consolidation plans shelved until the economic picture stabilizes.
Gloomy Outlook with More Pain Ahead
In their earnings call, NYCB executives painted a gloomy outlook for 2023 as they brace for material loan losses over the next several quarters.
With multifamily rents and occupancy rates in NYC declining sharply, analysts expect a wave of landlord defaults that will hit NYCB hard.
Meanwhile, hopes for a swift Fed pivot to rate cuts later this year are fading. Hawkish comments from Fed Chair Jerome Powell this week make it likely rates will remain elevated for some time. This is another headwind facing NYCB and other rate-sensitive banks.
Until the economic clouds part, investors would be wise to continue shunning the beaten-down financial sector. Regional lenders in particular face a precarious road ahead.
Table 1: Key Financial Metrics
| Metric | Q4 2022 | Q4 2023 | Change |
|---|---|---|---|
| EPS | $0.31 | -$0.76 | -346% |
| Net Income | $100M | -$364M | -464% |
| Loan Loss Provisions | $10M | $530M | +5,100% |
Data Source: Company Filings
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