New York Community Bancorp (NYCB) has seen its stock price plummet since reporting an unexpected loss in the fourth quarter and cutting its dividend. The pressure increased after Moody's downgraded the company's credit rating to “junk.” Although the bank has appointed a new chairman and taken other steps to reassure investors, some concerns have been raised about the health of local banks. NYCB's woes stem in part from its decision to buy some of the assets of Signature Bank, which collapsed during last year's local banking crisis.
David Smith, U.S. banking analyst at Autonomous Research, and Christopher Marinac, research director at Janney Montgomery Scott, joined Yahoo Finance Live to weigh in on the bank's turmoil.
Marinak calls NYCB a “true player” in the multifamily space. He noted that the company is undergoing a “change in business model” and that “what we want them to do is really diversify their business.” But he said any change at the bank “couldn't happen fast enough for investors concerned about stock prices.”
Overall, Marinak believes part of New York Community Bancorp's problems were that it was trying to pre-empt changes in capital regulations, a process that he called “painful” for the company. He says: He said the market was shocked by the results and caused a “loss of confidence”.
Regarding concerns about how NYCB's woes will impact the regional banking sector as a whole, Smith said, “These issues are isolated to NYCB. “This is a fairly unique problem for NYCB.” They will likely invest in larger companies that are subject to tighter regulatory oversight. He added that NYCB's problem is one of “revenue rather than viability.”
For more expert insights and the latest market trends, click here to watch the full episode of Yahoo Finance Live.
Editor's note: This article was written by Stephanie Mikulich.
Josh Lipton: Chris, one thing I thought might be helpful for viewers is that when you talk about NYCB, a lot of viewers hear the word region and immediately think of small, tiny size, and there's nothing to see here. It is to think that there is no such thing. But this is a pretty big lender, right?
Christopher Marinak: yes. The balance sheet is $116 billion. They're a real player, especially in the multifamily market, the mortgage market. They do a fair amount of C&I financing. The company is going through a business model change that was happening before this episode, and they are a real player.
And I think what I want them to do is really diversify their books. As David said, it would be healthy to take a low-margin loan and turn it into a higher-margin loan. I think that will happen. The problem is timing. None of this can happen quickly enough for investors concerned about stock prices.
Julie Hyman: Chris, just to be clear, last spring we were witnessing situations where banks were going out of business, or were about to go out of business and were being sold to other banks. First of all, I want to ask Chris, and secondly, David, is that a concern in this particular case?
Christopher Marinak: Not for me. This company is a going concern and I think it will do very well. I think this is an episode where we lost confidence because of the way the earnings were communicated and just the level of surprise over last week's dividend cut and kind of the surprise that the regulators obviously had some involvement here. Inspire them to change.
They won a deal with the FDIC on Signature, so I think they were seen as kind of a very untouchable company, and now they're in the big league of large national banks, and they have both liquidity and liquidity. There is a transition in which it is necessary to demonstrate similar performance in . and risk management. It's just a transition that happened sooner than people thought. The role of capital continues to change within the Fed this year.
Although these are not 100% complete, banks are expected to comply fairly quickly. And I think part of this is that NYCB wants to get ahead of the curve and be very proactive. But it hurts to cut the dividend, and it hurts to take all this credit change right away. We certainly would have wished that something had happened last week that would have prepared the market in a different light, rather than shocking it.
Julie Hyman: And what about Dave?
David Smith: Yeah. I generally agree with Chris. You know, I think these issues are contained within NYCB. These are fairly unique problems for the bank, which is on the verge of transitioning from a small regional bank to a larger bank that is currently subject to more stringent regulatory oversight.
If you compare NYCB to the banks that failed last year, I think they have much better screening from a deposit standpoint, a much higher percentage of insured deposits, and a lower interest rate mark on their balance sheet. So, there are certainly questions about medium-term profitability and potential credit issues and multifamily assets, but I think this is certainly more of a revenue issue than a viability issue.
Josh Lipton: And then, Chris, I'd like to hear your opinion on whether you're surprised that regulators aren't monitoring NYCB more. As Julie pointed out earlier, we only started working with Silicon Valley Bank about a year ago.
Christopher Marinak: So, good question. I think regulators were embarrassed by what happened in Silicon Valley, First Republic, and Signature. It's on the FDIC. The OCC that we're taking over now has newly established customers in NYCB and basically we're monitoring to make sure that nothing like this is happening and that they're safe. I think we're saying we're going to manage this bank very carefully to make sure that. Transition to a new world order.
Many, including myself, are aware that the 2024 internal stress test needed to be conducted in June, and that changes must be made on December 31st and here in the first quarter for the company to reach its next goal. I think we are all guilty of not having done that. Be prepared for that. It's part of them increasing their reserves to their peers.
The main move for criticized loans, whether it's multifamily or office, is to stress test those loans, take the borrower, add 200 basis points, and ensure that the cash flow debt service coverage ratio is solid. I think it had a lot to do with making sure that . And that is the main reason why historical and non-historical loans were downgraded and then provisions were made. I don't think these loans will end up going bad.
It will struggle in a higher rate environment. But we might see the opposite. Interest rates will drop again and there may be some light at the end of the tunnel for refinancing. It's more a matter of timing than anything else.
Josh Lipton: Dave, Chris, thank you so much for joining us on the show today and helping us understand this story. And something tells us we're going to keep talking about it. I appreciate it very much.
Christopher Marinak: thank you.