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February 26, 2024

NYCB Rating Cut to Junk Status on Commercial Real Estate Fears

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Feb 7, 2024

Moody’s Investors Service downgraded New York Community Bancorp’s (NYCB) ratings to junk status on February 6th, 2024, citing concerns over the bank’s exposure to risky commercial real estate loans. This rating cut sent NYCB’s stock price plunging and prompted warnings of further downgrades.

Background

New York Community Bancorp is a regional bank primarily focused on multifamily lending in New York, with $63 billion in assets. Heading into its Q4 2022 earnings report last week, NYCB already faced market pressure over fears of faltering rent collections if rising rates lead to a recession.

However, NYCB shocked investors by reporting a $260 million loss for the quarter, driven by a spike in provisions for credit losses as the bank set aside more funds to cover potential loan losses. This loss, compared to a $100 million profit a year earlier, reflected the bank’s conservative approach in the face of economic uncertainty.

In the earnings call, NYCB management warned of emerging risks in its loan portfolio from pockets of rent delinquencies and elevated vacancies in its multifamily buildings. The bank also announced the surprise departure of its chief risk officer.

NYCB Cut to Junk

In response to these results and disclosures, Moody’s cut its ratings on NYCB’s senior unsecured debt to Ba1, the highest junk rating, from Baa3. Moody’s warned the rating could fall further, to Ba2.

The downgrade reflects Moody’s view that risks are rising for NYCB, especially regarding its significant New York commercial real estate exposure across a portfolio of over $56 billion in loans. With multifamily rents declining and vacancies ticking higher, Moody’s believes the cushion protecting NYCB’s loans has narrowed considerably.

Fitch Ratings also downgraded NYCB on Tuesday to one notch above junk status, while S&P Global Ratings took the bank off its watch for a downgrade but kept its rating at the lowest investment grade.

Market Reaction

NYCB stock plunged as much as 36% to $8.31 on Wednesday, February 8th, its lowest level since 1998, bringing its market cap down to $3.8 billion. The regional banking index KRE fell over 8% this week amid the fallout.

Several Wall Street analysts downgraded NYCB shares and cut price targets. Citi lowered its target to $9 from $11 and expects further significant downgrades if macroeconomic risks keep rising.

Short interest on NYCB stock has climbed to 9.3 million shares, showing a surge in bearish bets. Options markets indicate traders are bracing for more pain ahead.

Regional banks broadly sold off as analysts warned NYCB’s woes may not be isolated incidents in the current environment. M&T Bank and Signature Bank also set aside more loan loss reserves, signaling emerging credit issues.

What’s Next

The Fed’s latest policy statement noted “challenged areas” of the banking system, adding to worries. Further increases in provisions and dividends cuts may hit other regional lenders focused on commercial real estate in key markets like New York.

With risks accumulating and financial conditions tightening quickly, some economists believe Fed rate cuts later this year are likely. However, the NYCB situation highlighted pockets of weakness hidden beneath strong headline numbers on bank profits and lending.

As for NYCB itself, management emphasized they moved aggressively to recognize potential issues early. But investors clearly worry current capital levels may prove inadequate if risks keep rising, prompting the rating downgrades.

NYCB now faces uncertainty over its growth plans, as well as its ability to retain and attract talent. Its merger deal with Flagstar Bank, expected to close in 2H 2023, may also come under review given the stock rout and credit rating hits.

Table 1: NYCB Stock Key Data

Metric Value Change
Price $8.31 -36% (1-week)
Market Cap $3.8 billion -$2.1 billion (1-week)
Short Interest 9.3 million shares +73% (1-month)

NYCB faces further downside risks if macroeconomic headwinds worsen or if its asset quality deteriorates further. Investors will watch closely for signs of rising rent delinquencies and vacancies in NYCB’s multifamily portfolio. However, if inflation and rates moderate later this year as expected, NYCB could represent a value play for investors willing to stomach additional volatility.

Subheading: Analyst Comments

“The loss shows emerging credit issues that were obscured by strong recent reported earnings,” said Chris Curio, bank analyst at Curzio Research. “This could be the start of the government creating a new banking crisis.”

Greg Daco, chief U.S. economist at Oxford Economics, tweeted: “The turmoil engulfing NYCB is casting a dark cloud over the U.S. economic outlook.”

“There are many echoes to the early days of the savings and loan crisis in these events,” warned bank analyst Richard X. Whalen. However, NYCB CEO Thomas Cangemi stated the bank took prudent steps and has healthy capital levels.

Subheading: Lawsuit and Regulatory Scrutiny

After the huge stock drop, the law firm Kahn Swick & Foti announced it is investigating potential securities fraud claims against NYCB on shareholders’ behalf.

Additionally, NYCB remains under scrutiny from regulators after tense talks with the OCC regarding risk management deficiencies last year. The OCC’s investigation and demands played a role in driving the bank’s recent conservative reserving actions.

Going forward, regulators will likely take a very close look at NYCB’s financial resilience, risk management practices, and exposure to vulnerable commercial real estate. Further regulatory actions could create additional uncertainty for the bank.

Subheading: M&A Deal at Risk

NYCB’s proposed merger with Flagstar Bank, the U.S. banking subsidiary of Flagstar Bancorp, may need to be reassessed given NYCB’s stock plunge and credit rating cuts.

The merger-of-equals deal valued at $2.3 billion was just approved by shareholders last month and expected to close in 2H 2023. But the value gap between the merger partners has widened dramatically.

Flagstar may seek to renegotiate terms or walk away entirely if NYCB’s franchise deteriorates further. Losing this deal would eliminate hoped-for scale benefits and cost savings for NYCB. The bank may struggle to find another partner willing to merge given its recent challenges.

So in summary, NYCB faces a host of financial, legal, regulatory, and strategic uncertainties after this week’s disastrous earnings report and rating downgrades. Its stock rout indicates investors see rising risks of contagion across regional banks and the broader economy. How well NYCB management navigates the coming months could determine whether investor fears become reality or if NYCB can recover from its current wounds.

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AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.

By AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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