New York Community Bancorp’s stock price plunged over 40% this week after the bank reported an unexpected $260 million loss in the fourth quarter of 2023. The losses stem from rising provisions for credit losses tied to the bank’s large commercial real estate loan portfolio.
Unexpected Losses Lead to Stock Selloff
On January 31st, NYCB shocked investors when it reported a $260 million loss for the fourth quarter. This represented a steep decline from the $100 million profit the bank earned in the same quarter last year.
The losses were driven by NYCB setting aside $350 million for potential future loan losses. This is over 4 times the $82 million it set aside a year earlier. NYCB holds the largest portfolio of multifamily loans in the US, making up over 60% of its total loans. With rising interest rates and signs of weakness in the commercial real estate market, the bank is bracing for potential trouble.
In reaction to the shocking loss, NYCB’s stock plunged 38% on Wednesday. The selloff vaporized over $3 billion of the bank’s market value, showing investors have serious doubts about its future prospects.
| Date | NYCB Share Price | % Change |
|---|---|---|
| Jan 31 (Before earnings release) | $11.26 | – |
| Feb 1 (After earnings plunge) | $6.99 | -38% |
NYCB’s share price plunged 38% the day after reporting surprising losses. This steep selloff shows investors rapidly losing confidence.
Credit Downgraded to Junk Status
The terrible quarterly results also prompted credit ratings agencies to downgrade NYCB’s debt. On Tuesday, Moody’s cut the bank’s credit rating two notches from Baa3 to Ba1, putting it into “junk” status.
The downgrade means NYCB’s bonds are now considered below investment grade. This will make it more expensive for the bank to raise capital or fund loans.
Moody’s said the downgrade “reflects the significant deterioration in NYCB’s asset quality and profitability.” The agency warned further downgrades could come if the bank takes further losses.
Fitch Ratings also downgraded NYCB on Tuesday, dropping it even deeper into junk territory from BBB- to BB+.
Commercial Real Estate Fears
At the heart of NYCB’s troubles is rising concerns over the health of the commercial real estate market, especially in the New York area. As one of the largest lenders to multifamily buildings in New York, the bank is exposed to weakness in the market.
With remote work draining demand for office space and apartments, property values could decline. This could lead to loan defaults if buildings generate less rental income to make payments.
Rising interest rates also threaten to undermine property values and repayment ability. Most commercial mortgages have variable rates tied to benchmarks like the 10-year Treasury yield, which has nearly doubled over the past year. This makes loans more expensive, increasing default risk.
If property values sink far enough, NYCB could face writedowns on its over $56 billion in commercial real estate loans. This helps explain why the bank is reserving hundreds of millions for potential losses even before any defaults occur.
What Happens Next?
NYCB still maintains it has the financial strength to weather challenges ahead. The bank noted it holds excess capital above regulatory minimums. Its CEO also emphasized only a small fraction of its loans are currently delinquent.
However, continued stock declines and credit downgrades could create a negative spiral. If investors flee the stock and creditors charge higher rates, it leaves NYCB more vulnerable to shocks. Competitors could also poach customers away with better loan rates.
To turn sentiment around, NYCB will likely need to show improving credit conditions and a stemming of losses in coming quarters. It may also face pressure to reduce its concentration in commercial real estate lending to diversify risks.
If property markets significantly worsen, NYCB could even become an acquisition target for a healthier bank. Regulators have already reportedly been in tense talks with management about risk exposure, so a forced sale is not out of the question down the line.
For now, all eyes are on the New York real estate market. Its fate seems tied directly to that of NYCB in the quarters ahead. Expect intense focus on each new housing statistic report as an indicator of whether the bank can rebound or faces an even more dire outcome.
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