New York Community Bancorp downgraded to underperform on 'bleak' outlook for rent-regulated multifamily housing
By Steve Gelsi
Analyst David John Chiaverini issues second downgrade to the lender this month
Wedbush Securities on Tuesday downgraded New York Community Bancorp to underperform from neutral in its second ratings cut this month of the lender on the bank's exposure to fixed-rate rental units against inflationary price pressure.
Analyst John Chiaverini cut his price target for New York Community Bancorp (NYCB) to $8 a share from $12 and said the bank faces "sizable exposure" to the rent-regulated multifamily lending market in New York City.
"While occupancy levels should remain strong even through a potential recession, we believe rent growth may not be high enough to cope with higher interest rates," Chiaverini said.
Rent-regulated properties face stress that could lead to a rise in nonperforming loans, loan modifications at below-market rates, and elevated reserve building to cover losses, he said.
New York Community Bancorp's stock rose 1.7% on Tuesday as the overall market rallied on tame inflation data.
Wedbush's latest rating action on New York Community Bancorp comes after a stock downgrade on Nov. 3 to neutral from outperform on the bank's exposure to commercial real estate in a higher-for-longer interest-rate environment.
Wedbush noted that as of the third quarter, New York Community Bancorp had $37.7 billion of multifamily loans on its balance sheet. About half of these loans are New York City rent-regulated.
That sub-sector of the bank amounts to total exposure at $18.8 billion or roughly 22% of total loans.
While market-rate rentals are able to respond with rent price increases based on supply and demand, rent-regulated apartments have caps set by rent guideline boards.
"We believe the impact of inflation could continue to pressure costs further in 2023, thus negatively impacting cash flows for building owners," Chiaverini said.
New York Community Bancorp has noted that incremental multifamily loan yields are coming on in the 7.5% to 8% range, compared to 3.5% to 4% just a few years ago.
"We fear that pressure on building cash flows combined with higher interest expenses could lead to declines in debt service coverage ratios, and this dynamic may be manifested as loan maturities occur along with loan modifications are provided," Chiaverini said.
New York Community Bancorp could see 10% losses on its rent-regulated multi-family portfolio, Wedbush estimated. This could result in a 20% reduction to tangible book value and a valuation of about $8.20 a share, close to Wedbush's new price target of $8 a share for the lender.
New York Community Bancorp has been in the spotlight this year as the acquirer of Signature Bank, the former component of the S&P 500 SPX that went out of business in the Spring after Silicon Valley Bank.
Also read: New York Community Bancorp's profit up 148% with boost from Signature Bank acquisition, as stock rises
-Steve Gelsi
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11-14-23 1030ET
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