New York Community Bancorp (NYCB) experienced a significant setback as Moody’s downgraded its debt to junk status. This comes at a time when the regional lender’s shares have dropped to their lowest level since 1997.
Despite Tuesday’s session where NYCB stock plummeted by 22%, there was a slight rebound in premarket trading on Wednesday with a 5% increase, bringing the price to $4.40. However, the bank is still grappling with the aftermath of its recent earnings report. NYCB revealed wider-than-expected loan losses and a dividend cut, which further compounded its troubles.
The root cause of NY Community Bancorp’s problems lies in its commercial real estate loans. The value of these loans has been adversely affected over the past couple of years due to rising interest rates. This situation serves as a stark reminder for investors of the regional bank turmoil witnessed in the previous year when First Republic Bank, Silicon Valley Bank, and Signature Bank came crashing down.
One of the contributing factors to NY Community Bancorp’s current challenges is its acquisition of Signature Bank. This acquisition pushed the bank over a regulatory threshold that now mandates it to hold more capital than it did previously.
Moody’s two-notch downgrade to junk status is based on various financial, risk-management, and governance challenges faced by NYCB. The ratings agency highlights that confidence in NY Community Bancorp has wavered due to its commercial real estate lending and unexpected losses from its New York office and multifamily property loans.
NY Community Bancorp Indicates Ample Liquidity Despite Moody’s Downgrade
In a recent filing with the Securities and Exchange Commission (SEC), NY Community Bancorp reassured investors that it has sufficient liquidity and expects the recent Moody’s downgrade to have minimal impact on its contractual arrangements.
Concerns Over Commercial Property Loans
During a House committee hearing on Tuesday, Treasury Secretary Janet Yellen expressed concerns about commercial property loans, highlighting the importance of regulatory oversight in this area. In line with these concerns, NY Community Bancorp confirmed the departure of Nicholas Munsun, its former chief risk officer, earlier this year.
Transitioning Leadership Roles
NYCB disclosed in its SEC filing that it is currently in the process of appointing a new chief risk officer and chief audit officer. While the positions are being filled on an interim basis, qualified individuals are expected to assume these roles permanently.
Struggles Facing Small Banks
According to analysts at Gavekal Research led by Will Denyer, NYCB’s challenges are not unique, as other banks across the United States are also grappling with profitability and asset quality issues. Small banks appear to be especially affected by these difficulties.
Market Reaction
Shares of the SPDR S&P Regional Bank exchange-traded fund experienced a 1.2% increase in the premarket session. Additionally, regional bank Valley National Bancorp saw a 0.6% increase in its shares, while Bank OZK witnessed a 1% surge.
