New York Community Bancorp: Strike While The Iron Is Hot (NYSE:NYCB)
New York Community Bancorp (NYCB) recently faced significant challenges, leading to panicked responses from investors. A notable 70% slash in its dividend, catalyzed by loan losses in commercial real estate, offices, and multi-family sectors, kindled concerns over a potential new regional banking crisis. Further intensified by a downgrade to junk status by Moody’s, the market’s fear meter spiked, presenting what could be seen as a contrarian investment opportunity.
Historically, NYCB has enjoyed a solid reputation, especially for its mortgage and servicing business, alongside significant engagements in multi-family and warehouse lending. Owning approximately 420 branches across the Northeast and Midwest, NYCB stood as a regional banking heavyweight.
The turn of events began with its 4Q earnings revelations, disclosing troubles particularly with multi-family and office loans. The commercial real estate office market, hurt by higher interest rates and reduced income projections, exacerbated financial strains for borrowers, prompting NYCB to bolster its loan reserves. This move significantly soured investor sentiment towards the bank.
At the end of 2023, NYCB’s allowance for credit losses escalated to $992 million, a stark rise from $667 million the previous quarter. This jump reflected not just a rise in the allowance for credit losses to 1.17% from 0.74% but also triggered a panicked sell-off, fueled by the steep dividend cut.
However, a more granular examination reveals that NYCB’s credit quality issues might not be as dire as currently perceived. Despite the market’s acute reaction, comparisons with peers suggest a more nuanced picture — NYCB’s allowance for credit losses relative to its non-performing loans stood at 232%, fare better than the peer average of 258%.
Focusing on NYCB’s commercial real estate sector, it’s noticeable that about 25% of all loans were allocated to the office segment, summing up to $3.4 billion in exposure, plus an additional $1.1 billion in riskier acquisition, development, and construction loans. Yet, these figures represented less than 4% of NYCB’s total assets, which amounted to $116.3 billion at the year’s close.
A testament to NYCB’s resilience is its balance sheet robustness, with loans and leases remaining stable QoQ at $83.6 billion. The bank also proactively increased on-balance sheet liquidity by $4.6 billion in 4Q-23, a strategic move to reassure investors of its operational sustainability amidst heightened loan losses.
The overreaction to NYCB’s challenges has been stark, with a Relative Strength Index plummeting to 14.39, signaling excessive bearish sentiment. However, this extreme pessimism, especially in light of NYCB’s credit quality and balance sheet health, seems unwarranted.
Another looming concern is the risk of receivership, a scenario where the Federal Deposit Insurance Corporation (FDIC) may take over. While the possibility exists, NYCB’s strong liquidity and credit quality significantly mitigate this risk. The precedent set by the central bank’s swift intervention last year to stabilize the banking sector further reassures that an immediate liquidity crisis for NYCB seems unlikely.
The panic surrounding NYCB, especially after the dividend cut, may be overblown. Comparing the bank’s situation and credit quality with peers shows that it remains on a relatively solid footing. The dramatic sell-off, leading to a valuation at a 70% discount to book value, seems more a reflection of market fear than fundamental weakness. With the bank’s dividend now adjusted and the stock significantly underpriced, there appears to be a ripe opportunity for a valuation rebound.
In conclusion, NYCB’s recent hardships have undeniably shaken investor confidence. Yet, for those looking beyond the immediate tumult, the bank’s underlying strengths and the exaggerated sell-off present a compelling contrarian opportunity. With a rational assessment of NYCB’s financial health and market position, investors might just find that now is an opportune moment to strike while the iron is hot.
