Shares of New York Community Bancorp Inc. (NYCB) tumbled 23 percent to kick off the trading week on March 4, driven this time by the stock’s downgrades from Fitch Ratings and Moody’s Investors Service.
Fitch slashed the company’s long-term issuer default rating to junk status, to BB+ from BBB-. The rating outlook was also “negative.”
The decision was made after NYCB uncovered “material weakness” in its internal controls.
“Although such weakness has not resulted in NYCB’s revision of prior period financial statements, it has prompted a reconsideration of NYCB’s controls around adequacy of provisioning, particularly with respect to its concentrated exposure to commercial real estate,” Fitch stated.
The credit rating firm warned that NYCB will find it challenging to replenish its core deposits “in an environment where competition for deposits remains high.” It also expects weaker earnings amid lower earning balances and net interest income this year.
Looking ahead, NYCB could face many headwinds, including significant loan losses, spikes in nonperforming assets, outsized quarterly net losses, and inadequate liquidity volumes. If any of these occur, Fitch confirmed it could initiate further negative rating actions.
In a March 2 report, Moody’s analysts also alluded to the same concerns regarding “material weakness” in the bank’s internal controls caused by “ineffective oversight, risk assessment and monitoring activities.” They stated that NYCB risks grappling with growing credit losses and higher funding costs, which could “complicate the bank’s ability to organically raise capital.”
As a result, the ratings company downgraded all of NYCB’s long-term ratings and assessments and some short-term ones, as well.
Moody’s analysts don’t believe the entity’s ratings or outlook will improve in the next 12 to 18 months. According to Moody’s, NYCB’s ratings could be downgraded if further challenges are discovered, credit performance deteriorates, capitalization weakens, and a loss of depositor confidence intensifies.
This comes one month after Moody’s cut the bank’s credit status to junk.
In addition to concerns surrounding the “significant concentration” of commercial real estate loans, Moody’s noted in a Feb. 6 announcement that NYCB’s share of uninsured deposits was 33 percent as of Dec. 31, 2023.
“The bank could face significant funding and liquidity pressure if there is a loss of depositor confidence,” it wrote.
Both rating firms downgraded NYCB’s bank subsidiary, Flagstar Bank, N.A.
Ticking Time Bomb on Wall Street
New York Community Bank’s troubles started at the end of January when it posted a surprise loss, slashed its dividend, and hinted at difficulties in commercial real estate. For Wall Street, the poor earnings report harkened back to a year ago, when other regional institutions endured hefty losses.
Following the disappointing fourth-quarter earnings report, NYCB lost a third of its value in a single session as shares fell 38 percent at the end of the Jan. 31 trading session.
Investors have had a rough time trying to navigate through all the turbulence.
Over the past month, there have been notable personnel changes. Nick Munson, the chief risk officer, left the company. NYCB named Alessandro DiNello, a banking veteran, as its executive chairman. The firm disclosed shortly after the announcement that CEO Thomas Cangemi exited the company, with Mr. DiNello serving as the genuine chief executive since Feb. 6.
Market analysts have expressed fears surrounding the business’s “governance risks.”
Traders were optimistic after it was revealed that insiders purchased additional shares in the bank. However, the upbeat attitude was erased when NYCB revised its fourth-quarter loss to $2.7 billion, up from $260 million in its initial estimate.
The troubles for NYCB didn’t come out of nowhere, as economists and U.S. officials have cautioned about banks highly concentrated in the commercial real estate sector for months.
“Valuations are falling. And so it’s obvious that there’s going to be stress and losses that are associated with this,” Ms. Yellen told lawmakers. “I hope and believe that this will not end up being a systemic risk to the banking system. The exposure of the largest banks is quite low, but there may be smaller banks that are stressed by these developments.”
While speaking during a “60 Minutes” interview, Federal Reserve Chair Jerome Powell called it a “manageable problem” for the big banks, noting that it’s unlikely that there will be a repeat of the global financial crisis of 2008–09.
At the same time, smaller and regional banks with concentrated exposures in commercial real estate could be a challenge.
“This is something we’ve been aware of for a long time, and we’re working with them to make sure that they have the resources and a plan to work their way through the expected losses,” Mr. Powell said.
First Anniversary Approaches
The first anniversary of the regional banking crisis is on the horizon.It has been nearly a year since the failures of Silicon Valley Bank (SVB) and Signature Bank, a meltdown fueled by a blend of risk mismanagement, a collapse in the value of investments, and clients rushing to withdraw their deposits. The closures of SVB and Signature resulted in the U.S. government, led by the Fed, the Treasury Department, and the Federal Deposit Insurance Corp., to bail out customers with uninsured deposits.
In the aftermath of the SVB and Signature turmoil, other financial institutions, including First Republic Bank, failed. Coincidentally, NYCB purchased Signature’s assets in a $2.7 billion deal.
Over the past year, the U.S. government has repeatedly assured the public that the banking system is safe, sound, resilient, and highly liquid.
Mr. Powell is scheduled to appear this week on Capitol Hill, where he likely will be asked about the latest developments surrounding NYCB.
