Some NYCB deposits may be at risk after another Moody’s downgrade

Some NYCB deposits may be at risk after another Moody’s downgrade

A sign is pictured above a New York Community Bank branch in Yonkers, New York, USA, January 31, 2024.

Fresh Mike | Reuters

Regional Lender New York Community Bank The company may have to pay more to retain deposits after one of the company’s key ratings was downgraded for the second time in a month.

Late Friday, Moody’s Investors Service lowered the deposit rating of NYCB’s main banking subsidiary by four notches from Baa2 to Ba3, three notches below investment grade. This followed a two-notch cut by Moody’s in early February.

The downgrade could trigger contractual obligations from NYCB’s counterparties that require the bank to maintain an investment-grade deposit rating, according to analysts who follow the company. (Consumer deposits with FDIC-insured banks are covered up to $250,000.)

NYCB has been in a stock free fall that began a month ago when the company reported a surprise fourth-quarter loss and higher provisions for loan losses. Concerns intensified last week after the bank’s new management found “significant weaknesses” in its review of its commercial loans. The bank’s shares have fallen 72% this year, including a 19% decline on Monday, and now trade for less than $3 apiece.

Of key interest to analysts and investors is the status of NYCB’s deposits. Last month, the bank said it had $83 billion in deposits as of Feb. 5 and that 72% of them were insured or collateralized. But the figures come from the day before Moody’s began downgrading the bank’s ratings, sparking speculation ever since about a possible deposit exodus.

Moody’s rating cuts could impact funds in at least two areas: a banking-as-a-service business with $7.8 billion in deposits as of the May regulatory filing and a mortgage escrow unit with deposits in the amount of 6 to 8 billion US dollars.

“There is potential risk to deposit servicing in the event of a downgrade,” Citigroup analyst Keith Horowitz said in a Feb. 4 research note. NYCB executives told Horowitz that the deposit rating, which Moody’s then set at A3, would have to fall four notches before it would be at risk. Since this note was published, the price has fallen six notches.

During a conference call on Feb. 7, NYCB Chief Financial Officer John Pinto confirmed that the bank’s mortgage escrow business must maintain investment-grade status and said the amount of deposits in the unit varies between $6 billion and $8 billion.

“If there’s a contract with these depositors that says they have to have an investment grade rating, that would theoretically be a triggering event,” KBW analyst Chris McGratty said of Moody’s downgrade.

NYCB did not immediately respond to calls or an email seeking comment.

It could not be determined what the contracts require NYCB to do if it violates investment grade status, or whether downgrades by multiple rating firms would be required to trigger contractual provisions.

To replace the deposits, NYCB could raise brokered deposits, issue new debt or borrow from Federal Reserve facilities, but all of that would likely involve higher costs, McGratty said.

“They will do whatever is necessary to keep deposits in-house, but as this scenario plays out, the cost of funding the balance sheet could become more prohibitive,” McGratty said.

This story is developing. Please check back for updates.

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2024-03-04 20:52:50