Potential failure of NYCB is 'squarely off the table (for the time being),' analyst says

By Steve Gelsi

Citi analyst sees a long road ahead for NYCB, with core deposit growth as key to success

New York Community Bancorp.'s turnaround plan under its new management team will keep the bank afloat for the time being after the lender faced speculation that it could fail, Citi analyst Ben Gerlinger said Thursday.

Gerlinger reiterated a neutral/high-risk rating on NYCB (NYCB) after the bank's stock rallied 28% on its narrower-than-expected loss and its "path to profitability" over the next couple of years under new Chief Executive Joseph Otting.

NYCB's stock fell 1% on Thursday.

Gerlinger said the risk of failure "is squarely off the table (for the time being)" after he saw the bank's first-quarter results.

However, NYCB needs to execute on three major fronts: grow its commercial banking presence, manage and shrink a "languishing" commercial real estate portfolio and grow core deposits, he said.

While some of the bank's targets "seem lofty" the management team "has the pedigree needed to move the bank in the right direction," Gerlinger said.

The bank faced a steep drop in its share price in March amid speculation about a potential failure, after it disclosed material weakness and signaled trouble with two commercial-real-estate loans, as Wall Street took notice of its exposure to stressed values of rent-regulated multi-family homes in New York City.

The bank then raised $1 billion in capital led by former Treasury Secretary Steven Mnuchin's private-equity firm and named Otting its CEO.

KBW analyst Christopher McGratty reiterated a market-perform rating on NYCB and said shares will likely remain range-bound between $3 and $4 for the time being.

"Low expectations and a roadmap to improved profitability drove shares nearly 30% higher on Wednesday," McGratty said. "For the timebeing investors can breathe a sign of relief given this was the 'heavy lift /communication' quarter."

Looking ahead, the bank's path toward a "respectable" return on tangible common equity ( ROTCE) remains challenging and will take "significant time," he said.

Moody's analyst Stephen Lynch said the bank's profitability growth targets through 2026 are a credit positive.

"Crucially for lenders, the bank appears to have managed deposit attrition," he said.

However, NYCB has turned toward the lower-margin business of wholesale funding for deposits, which includes the business of holding deposits from other banks for account holders with more than $250,00 who want more of their money covered by FDIC insurance.

"NYCB plans to maintain total assets around current levels while reducing commercial real estate exposure by over a third by re-allocating capital into commercial and industrial loans with better deposit relationships, another credit positive," Lynch said.

Even with the big gain on Wednesday, NYCB's stock has fallen 66.8% in 2024 prior to Thursday's trades, compared to a 5.2% rise by the S&P 500 SPX.

-Steve Gelsi

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05-02-24 1030ET

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