New York Community Bancorp (NYCB) experienced a significant blow as its stock price plummeted by 38% following its unexpected loss in the fourth quarter. This decline marked the largest drop in the stock’s history, catching investors off guard and raising concerns about the bank’s financial stability.
The unexpected loss was primarily attributed to significant charge-offs related to two loans in NYCB’s portfolio. The first loan was a co-op loan with unique features that pre-funded capital expenditures. Although the loan was not in default, NYCB decided to transfer it to held for sale, resulting in a charge-off in Q4. The bank plans to sell this loan in the first quarter and has stated that it does not have similar characteristics in its other co-op loans.
The second loan charge-off was an office loan that was non-accrual in the third quarter. Due to recent credit deterioration within the office portfolio, NYCB increased its allowance for credit losses coverage ratio. As a result, the bank recorded a provision for credit losses of $552 million in Q4, significantly higher than the $62 million recorded in Q3.
In addition to the unexpected loss, NYCB is also focused on rebuilding its capital ratios. Following its acquisitions of Flagstar Bank and Signature Bank, NYCB’s total assets exceed $100 billion, making it a Category IV bank subject to more stringent capital requirements. To meet these requirements, NYCB made the decision to slash its quarterly dividend by 71%, from $0.17 to $0.05 per share. This move, along with lower earnings guidance for the year, has led analysts to cut their annual EPS forecast by 33% to $0.88 per share.
While NYCB’s stock may now be trading at a 47% discount to its tangible book value, investors should approach with caution. Rebuilding capital to meet regulatory standards will take time, and the bank’s profitability in the near term is expected to be lower. Furthermore, concerns surrounding the commercial real estate market, which constitutes a significant portion of NYCB’s loan investments, add to the uncertainty surrounding the bank’s future performance.
The bank’s situation is further complicated by recent events. Moody’s downgraded NYCB’s credit rating to junk status, citing “high governance risks” due to the departure of key executives. Additionally, Bloomberg reported that NYCB executives held talks with officials at the Office of the Comptroller of the Currency (OCC), indicating potential regulatory challenges ahead.
While the current discount on NYCB’s stock may attract value investors, it is crucial to approach with caution and consider the risks involved. Rebuilding capital and restoring investor confidence will take time, and there is a possibility of customer withdrawals if confidence is lost. However, NYCB has assured that 72% of its deposits are FDIC-insured and that it has sufficient liquidity to cover any uninsured deposits.
For now, it may be wise for investors to wait for the dust to settle before making any decisions regarding NYCB’s stock. The bank’s future trajectory will depend on its ability to rebuild capital, address governance concerns, and navigate the challenges posed by the commercial real estate market.