New York Community Bancorp's sole traded bond takes another leg down after Moody's cuts rating to junk

By Mike MurphyCiara Linnane

Rating action 'reflects multi-faceted financial, risk-management and governance challenges facing NYCB,' Moody's says

Moody's Investors Service downgraded New York Community Bancorp's credit by two notches late Tuesday, lowering it into speculative-grade or "junk" status and sending the bank's stock down another 10%.

The ratings company cut the rating to Ba2 from Baa3 and said it remains on review for possible further downgrade.

"Today's rating action reflects multi-faceted financial, risk-management and governance challenges facing NYCB," Moody's said in a statement.

The bank is seeking to build up its capital but has just taken an unexpected loss on commercial real estate, "which is a significant concentration for the bank," Moody's said.

New York Community Bancorp shares (NYCB) plunged 22% to close at their lowest level since 1997 on Tuesday. The bank immediately moved to reassure investors spooked by the Moody's move, saying total deposits have increased in the last several weeks and that it had "ample" liquidity.

The stock has slumped about 60% since the bank posted a surprise quarterly loss last week and disclosed trouble with its commercial real-estate loans. The company also slashed its dividend to build up capital to meet regulatory requirements.

Also Tuesday, Treasury Secretary Janet Yellen told lawmakers on Capitol Hill that she was "concerned" about risks to the commercial-real-estate market, noting that "there may be some institutions that are quite stressed by this problem."

Read also: New York Community Bancorp looks to sell rent-regulated commercial real estate after surprise quarterly loss

Moody's said the bank "faces high governance risks from its transition with regards to the leadership of its second and third lines of defense, the risk and audit functions of the bank, at a pivotal time," adding that "control functions with strong knowledge of a bank's risks are key to a bank's credit strength."

Adding to the gloom, the bank confirmed on Wednesday that its chief risk officer and chief audit executive left the bank earlier this year.

The news stirred unhappy memories of the demise of Silicon Valley Bank last year, when the absence of a chief risk officer contributed to the run on that bank.

Also read: Silicon Valley Bank CEO's stock sales and chief risk officer's exit may trigger closer look by Feds: SEC veteran

New York Community Bancorp said it has added board member Alessandro (Sandro) DiNello as executive chair to "work alongside" Cangemi in an effort to "improve all aspects of the bank's operations."

"NYCB's core historical commercial real estate lending, significant and unanticipated loss on its New York office and multifamily property could create potential confidence sensitivity," Moody's said. "The company's elevated use of market funding may limit the bank's financial flexibility in the current environment."

The bank is highly exposed to rent-regulated multifamily properties, a segment that has performed well in the past. But this cycle may prove different, given higher interest costs when properties are refinanced and higher maintenance costs due to inflationary pressures.

The bank is also exposed to low-fixed-rate multifamily loans, which also face refinancing risk.

New York Community Bancorp's provision for loan losses rose 526% in 2023 to $833 million from the prior year. As of Dec. 31, the reserve stood at $992 million, equal to 1.17% of total loans, or 1.26% excluding loans with government guarantees and warehouse loans.

The bank's share of uninsured deposits was 33% as of year-end, and it could face significant funding and liquidity pressure if there is a loss of depositor confidence, Moody's said.

New York Community Bancorp has just one traded bond, a floating-rate note that matures in November of 2028. That bond fell off a cliff last week, as MarketWatch reported.

On Wednesday, the bond took another tumble to as low as 72.14 cents on the dollar, as the following chart from data-solutions provider BondCliQ Media Services shows.

New York Community Bancorp's stock move, meanwhile, weighed on other regional banks, with KeyCorp (KEY) down 2%, Comerica Inc. (CMA) down 1% and Citizens Financial Group Inc. (CFG) down 2%.

The SPDR S&P Regional Banking exchange-traded fund KRE was down 1.8%.

-Mike Murphy -Ciara Linnane

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02-07-24 1451ET

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