Wall Street worries about NYCB’s loan losses and deposit levels

Wall Street worries about NYCB’s loan losses and deposit levels

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 appears to be in a deteriorating situation just as the anniversary of last year’s banking turmoil approaches.

Shares of the troubled lender plunged 25% to below $4 apiece on Friday after NYCB revised down recent quarterly profits by $2.4 billion, formally replaced its CEO and the release of a key annual report delayed.

But the most worrying development is directly related to investor fears about commercial real estate and the deficits the bank reported in a key aspect of its business: NYCB said poor oversight had led to “significant weaknesses” in the review of its portfolio of loans.

The disclosure raises “significant concerns that suggest borrowing costs could be higher over a longer period of time,” Raymond James analyst Steve Moss said in a research note on Thursday. “The disclosures reinforce our concerns about NYCB’s interest-based multifamily portfolio, which may require a lengthy wind-down period unless interest rates decline.”

In a remarkable reversal of fortunes, a year after deposit flows engulfed regional lenders like Silicon Valley Bank, NYCB – one of the supposed winners of the period after acquiring some of Signature Bank’s assets following government seizure – is standing. now faced with existential questions of his own.

Difficult quarter

The bank’s fortunes suddenly changed a month ago after a disastrous fourth-quarter report in which it posted a surprise loss, cut its dividend and shocked analysts with the size of its provisions for loan losses.

Days later, ratings agency Moody’s lowered the bank’s credit rating by two notches to Jordan amid concerns about the bank’s risk management capabilities following the departure of NYCB’s chief risk officer and chief audit executive.

At the time, some analysts were comforted by the steps NYCB was taking to bolster its capital, noting that the promotion of former Flagstar CEO Alessandro DiNello to chairman had boosted confidence in management. The bank’s stock was briefly buoyed by a flurry of insider buying that showed executives’ confidence in the bank.

DiNello became CEO on Thursday after his predecessor resigned.

Deposit update?

Now, amid the tumult, some are questioning the stability of the NYCB’s deposits. Last month, the bank said it had $83 billion in deposits as of February 5, a slight increase from the end of the year. Most of these deposits are insured and there are ample resources available if uninsured deposits leave the bank, it said.

“NYCB has still not provided an update on deposits, from which we can only conclude that they have declined,” DA Davidson analyst Peter Winter said in a note on Thursday.

“The question is, by how much?” asked Winter. “In our view, corporate treasurers reconsidered whether they would retain their deposits with NYCB when their debt rating was downgraded to junk.”

In a statement released Friday announcing a new chief risk officer and chief audit executive, NYCB CEO DiNello noted that he had identified the vulnerabilities disclosed Thursday and was “taking the necessary steps to address them.” The bank’s provision for loan losses is not expected to change, he added.

“The company has strong liquidity and a solid deposit base, and I am confident we will execute on our turnaround plan,” DiNello said.

Important inventory breached

Pressure on NYCB’s operations and profitability amid elevated interest rates and a bleak loan default outlook has raised questions about whether NYCB, until recently a serial buyer of banks, will be forced to sell itself to a more stable partner.

Ben Emons, head of fixed income at NewEdge Wealth, noted that banks trading for less than $5 a share are seen by markets as being at risk of being seized by the government.

A NYCB representative did not immediately respond to a request for comment.

For now, the concern appears to be limited to NYCB, where commercial real estate accounts for a larger share of loans compared to some competitors. While NYCB stock hit a 52-week low of $3.32 per share on Friday, other bank indexes saw only slight declines.

“We expect further questions about whether NYCB will sell,” Citigroup analyst Keith Horowitz said in a note. “But we don’t see many potential buyers here even at this price because of the uncertainty… in our view, NYCB is on its own.”

This story is developing. Please check back for updates.

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2024-03-01 17:19:05