Regional bank New York Community Bancorp sent its stock price plunging 35% on Wednesday after unexpectedly cutting its dividend by 71% and swinging to a loss in the fourth quarter. The bank, better known as NYCB, has significant exposure to the multifamily real estate market in New York, which is under pressure. This turbulence for a bank that had positioned itself as a rescuer in 2023 is reigniting fears for regional banks.
Dividend Cut Far Exceeds Expectations
NYCB slashed its quarterly dividend from $0.17 per share down to just $0.05 per share. This was far below analyst expectations of $0.15 per share and comes after the bank raised its dividend for three consecutive years through 2022.
The bank stated the dividend cut was necessary to retain capital and maintain “healthy” capital ratios after the surprise loss in Q4. NYCB had Common Equity Tier 1 and Total Risk-based capital ratios of 8.34% and 11.92% at Dec. 31. While these ratios meet regulatory requirements, they represent a significant decline from 9.71% and 13.60% a year ago.
CEO Thomas Cangemi stated: “We were disappointed to cut the dividend, however, preserving capital is our foremost priority as we navigate potential headwinds.”
The 71% dividend cut is one of the largest ever in the banking sector and signals that NYCB sees significant stress ahead in 2024 that threatens its financial health.
Swung to Surprise $127 Million Loss
In addition to slashing the dividend, NYCB shocked investors by swinging to a net loss of $127 million, or $0.27 per share, in Q4 2023. This compared very unfavorably to net income of $113 million, or $0.31 per share, in Q4 2022.
The loss was driven by a significant $562 million provision for credit losses in the quarter tied to rising delinquencies and charge-offs in its multifamily and CRE loan portfolios. The provision built reserves to 2.05% of total loans, far above 0.56% a year ago.
Multifamily Loan Stress Main Culprit
The main driver behind NYCB’s woes is its significant exposure to multifamily real estate loans in the New York City metro area. With rents falling rapidly, landlords are seeing their income drop even as expenses rise. This is leading to growing delinquencies and defaults on apartment building mortgages.
NYCB has over $56 billion in total loans outstanding, with nearly half of that tied to multifamily and commercial real estate. The bank has focused primarily on lending to smaller landlords, who tend to be more vulnerable in downturns than large property owners.
Charge-offs spiked to $150 million in Q4, 5X higher than a year ago. The charge-off ratio jumped to 1.06% from just 0.18% in Q4 2022, indicating significantly higher actual loan losses hitting the books.
Cangemi stated that macro uncertainty, PT Law impacts, and rent freezes were all contributing to the real estate market downturn and expectations that market conditions will remain challenged through at least mid-2024.
Financial Health At Risk Without Dividend Cut
While painful for shareholders, analysts agreed that slashing the dividend was necessary for NYCB to preserve capital and remain financially healthy through the real estate downturn.
The surprise Q4 loss obliterated nearly 30% of the bank’s retained earnings, leaving little choice but to cut the dividend to retain as much capital as possible. Even with the cut, the new $0.05 per share quarterly dividend still represents a high 7.8% dividend yield at the lower stock price.
S&P Global Ratings had just upgraded NYCB’s credit rating one notch to BBB+ with a Positive outlook on Jan. 17. However, the ratings agency warned on Wednesday that it could downgrade NYCB if softening multifamily market conditions in New York City lead to sustained elevated credit costs and weaker capital ratios.
While NYCB believes its capital ratios will remain above regulatory “well-capitalized” minimums through 2024, its dividends and share buybacks are no longer sustainable without raising additional capital. This led analysts to speculate the bank may need to cut expenses, lay off employees or even issue shares in 2024 to boost its capital buffers.
Regional Bank Peers Also Hit Hard
NYCB’s woes reverberated across the regional banking sector, dragging down share prices of banks with exposure to northeast multifamily markets. Signature Bank plunged 12%, Citizens Financial dropped 8.3% and First Republic fell 4.5%.
The selloff also hit larger banks like Bank of America, Citi, and JPMorgan over fears that financial conditions are weakening faster than expected.
Many regional banks positioned themselves as “rescuers” in 2023, taking advantage of market turmoil to acquire distressed assets on the cheap from struggling Wall Street titans. However, NYCB’s deteriorating financial performance demonstrates that mid-sized banks also face significant economic risks heading into 2024.
Fed Rate Hikes Add Further Pressure
NYCB’s shocking results come just hours before an expected 0.25% interest rate hike from the Federal Reserve, which would bring its benchmark rate to 4.75%-5.00%. While the Fed is poised to halt its aggressive rate hikes, the cumulative impact of rising interest rates is contributing to the downturn in housing.
Higher rates have crushed mortgage demand and home price appreciation over the past year. This is starting to cause rising delinquencies in residential loans as well as the apartment buildings often financed with commercial mortgages from banks like NYCB.
Analysts warn there could be more negative surprises ahead for banks if the U.S. enters recession later this year as expected. Financial stocks have rallied strongly in January on hopes the Fed is nearly done hiking rates. However, NYCB’s results demonstrate extreme caution is still warranted across the banking sector.
Further Margin Compression Ahead
The Fed’s rate hikes are also squeezing bank profits as short-term deposit costs rise faster than the yields banks earn on loans. Q4 saw NYBC’s net interest margin compress to 2.02% from 2.43% last year. Margin pressure often accelerates during recessions, indicating challenging quarters ahead for profitability.
Cangemi said changes in loan origination strategies should help stabilize margins near 2% over the next six months. The bank is retaining more loans on balance sheet rather than selling to the secondary market. However, analysts say if higher funding costs cannot be passed through to multifamily borrowers already under duress, it will weigh heavily on future earnings.
$1B Flagstar Merger Closed In December
Interestingly, NYCB closed on its approximate $1 billion acquisition of Flagstar Bank on December 1st. The bank expected Flagstar to be “immediately accretive to earnings and capital strength” thanks to its national mortgage origination business.
Instead, it now appears the merger actually diluted capital and served as poor timing amidst the accelerated New York real estate downturn. Flagstar may boost future results if mortgage volumes rebound, but weak underwriting standards in a declining housing market could expose NYCB-Flagstar to further losses.
This is not the first troubled merger for NYCB during a housing crisis either. Its acquisitions of failed banks like Desert Hills Bank and AmTrust Bank during the 2008 Financial Crisis also brought significant unexpected loan losses.
Stock Could Fall Further Before Stabilizing
Despite today’s 35% plunge, NYCB stock may not have hit a bottom yet. Shares still trade at a lofty 110% of tangible book value even after the selloff. If losses continue to mount in coming quarters, the stock likely has further to fall until investors can regain confidence in management.
Many analysts downgraded NYCB stock and/or cut price targets by 30-50%, implying additional downside risk of 15-25% still ahead. However, patient investors could be rewarded for holding NYCB long-term once the New York real estate market stabilizes.
The bank has proven resilient through many past regional housing crises due to its strong market position as one of the largest multifamily lenders in the NYC area. Over two decades, NYCB has grown to $67 billion in assets with 237 branches focused on core northeast markets unlikely to suffer a long-term decline.
Will Further Acquisitions Save The Bank?
The New York Post speculated that if conditions continue to deteriorate, NYCB management led by 30-year CEO Cangemi could seek another merger to throw a lifeline to the bank.
Potential partners mentioned were large banks like Truist or PNC plus regional banks M&T, Citizens Financial and even crypto-friendly Signature Bank. An acquirer could gain cheap access to the attractive NYC market.
However, it will be exceedingly difficult finding a buyer willing to take on exposure to NYCB’s deeply distressed multifamily portfolio amidst an aggressive Fed tightening cycle. Instead, investors braces for organic measures like dividend cuts, layoffs expense reductions, and capital raises as management fights to maintain profitability and credit quality.
Conclusion: Turbulent Times Ahead For NYCB
In conclusion, NYCB faces significant uncertainty and economic pain for at least the next 18 months until mid-2025 based on management’s commentary. The Fed’s cumulative rate hikes have sparked a cascading real estate decline that caught the bank unprepared despite its market-leading multifamily exposure.
Just six weeks after closing a transformative merger intended to strengthen NYCB for the next decade, the bank instead swung to a loss for the quarter, begging the question of whether cheap Flagstar deposits are worth the incremental credit risk. Investors must brace for further financial deterioration and capital raises until interest rates peak and housing markets stabilize.
Analysts warn investors not attempt to “catch a falling knife” by jumping into NYCB stock amid its vertical descent. Patience will be required before this once steady, high-yield income play regains Wall Street’s trust. Its epic dividend slashing may go down as a defining signal that economic conditions took an unexpectedly sharp turn entering 2024, with regional banks at the forefront facing hurricane-force headwinds.
|Earnings Per Share
|Loan Loss Provisions
|Net Charge-off Ratio
|Common Equity Tier 1 Capital Ratio
|Federal Funds Rate Peaks at 2.5%
|NYCB Raises Quarterly Dividend to $0.17 Per Share
|Federal Funds Rate Now 4.75%, Expected to Peak Around 5%
|NYCB Closes Merger with Flagstar Bank
|NYCB Cuts Quarterly Dividend 71% to $0.05 Per Share
|NYCB Expects Real Estate Conditions To Begin Improving
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