New York Community Bank (NYCB) is facing its third credit downgrade, raising concerns about a potential regional banking crisis. The downgrade comes nearly a year after the regional banking sector experienced a crisis that led to significant bank failures. Morningstar DBRS downgraded NYCB’s credit rating due to its “outsized” exposure to commercial real estate (CRE), which the bank has pledged to reduce in the coming months. Fitch and Moody’s also recently lowered NYCB’s ratings.
The downgrade is a result of several factors. CRE borrowers have been under pressure due to the higher interest rate environment and lower occupancy rates caused by the rise of remote work. NYCB’s exposure to the CRE market has raised concerns among investors, especially after the company posted a surprise loss and announced a dividend cut to boost reserves required by banking regulations.
Investors’ worries have caused NYCB’s stock to plummet to its lowest level since 2000. NYCB’s management is trying to restore investor confidence by considering the sale of loans in its commercial real estate portfolio or allowing them to run off the balance sheet naturally. The bank is also open to shrinking its balance sheet by selling non-core assets if necessary.
Treasury Secretary Janet Yellen acknowledged the weakness in the CRE market and expects additional stress and financial losses. However, she reassured that banking regulators are working with banks to address these risks. NYCB has already set aside more capital to meet regulatory requirements for capital and liquidity.
NYCB, which was founded in 1859, has grown through acquisitions over the years. It completed 13 acquisitions between 2000 and 2023, including the acquisition of Signature Bank last year during the regional banking crisis. The bank also recently acquired Flagstar Bank, expanding its footprint across the country.
The regional banking crisis that occurred last year resulted in some of the largest bank failures in U.S. history. First Republic Bank’s failure became the second largest, following Washington Mutual’s failure in 2008. This crisis surpassed the failures of Silicon Valley Bank and Signature Bank in 2023.
While NYCB faces challenges with its credit downgrade, it is taking steps to strengthen its financial position and address the concerns raised by investors. The future of the regional banking sector remains uncertain, but banking regulators are actively working to mitigate risks and prevent another crisis.