JPMorgan is buying NYCB loans partly to help smaller bank's turnaround: source

By Steve Gelsi

Loan sale to JPMorgan Chase will boost liquidity and reserve capital at NYCB, in a move to build up its balance sheet

JPMorgan Chase & Co.'s move to acquire a $5 billion loan portfolio from New York Community Bancorp Inc. marks an effort to provide needed capital to one of its commercial-banking clients while adding to its own sizeable loan-securitization business, a source familiar with the bank told MarketWatch.

JPMorgan Chase's (JPM) loan purchase from NYCB (NYCB) amounts to a smaller-scale version of JPMorgan's work with other banks to provide $30 billion in capital to the struggling First Republic Bank last year, the source said.

JPMorgan ended up buying First Republic in a government-led transaction.

JPMorgan's Commercial & Investment Bank is adding the "high-quality" NYCB loan portfolio to its loan-securitization business while providing capital to a commercial client that was shedding a noncore business at a competitive market price, the source said.

NYCB's stock gave back recent gains Wednesday on the heels of the deal, which marks a fresh move in the bank's plan to turn a profit and strengthen its balance sheet.

Jefferies analyst Casey Haire said the loan sale marks an "important first step to restore credibility" as the Hicksville, N.Y.-based NYCB looks to reverse recent losses under a management team that moved in a few weeks ago.

Also read: NYCB's stock stabilizes as it aims to build 'fortress' balance sheet and calm investors

Also read: New York Community Bancorp's stock jumps more than 30% after reporting narrower-than-expected loss

NYCB's stock (NYCB) fell 6.4% on Wednesday. The stock is up by about 28% in the past month.

Measured against its starting point for 2024, however, the stock remains 64% lower for the year after the bank's surprise loss and a material-weakness disclosure earlier this year.

The loan sale marks "incremental progress from the train wreck back in February and March," Janney analyst Chris Marinac said in an email to MarketWatch.

Marinac said in a Monday research note that NYCB's latest quarterly filings revealed an increase in "criticized loans" in its portfolio, but on the plus side, levels of problem loans remain moderate.

Also read: New York Community Bancorp's stock jumps more than 30% after reporting narrower-than-expected loss

On Wednesday, Jefferies reiterated a hold rating and a stock-price target of $3.50 for NYCB on the heels of the bank's loan-sale deal, which is expected to close in the third quarter.

"Details on transaction are vague, but given that mortgage warehouse loans are low-risk and short duration loans, we believe earnings per share impact is de minimis despite the fact that the loan sale represents 6% of total loans," Haire wrote in a research note.

The sale will help NYCB increase its adjusted common-equity Tier 1 capital ratio to 10.8%, which nearly reaches the bank's long-term target of 11% to 12%. It's also above the average of 10.4% for banks in its Category 4 size range, the Jefferies analyst said.

"We are moving forward quickly to implement our strategic plan, which focuses on improving our capital, liquidity and loan-to-deposit metrics," NYCB Chief Executive Joseph Otting said in a statement late Tuesday.

Common-equity Tier 1, or CET1, ratios reflect a lender's capital against its assets, which include cash and stock and other liquid holdings.

Meanwhile, NYCB's loan-to-deposit ratio will go down to 104% from 110% as the loan sale to JPMorgan increases the bank's liquidity profile.

Even at 104%, however, the bank will still be "meaningfully above" the average loan-to-deposit ratio of its peer group, Jefferies noted.

Mortgage-warehouse loans are issued between banks as part of the mortgage process to buy property. The loans are then securitized in the secondary market.

NYCB's bond price rose on Wednesday as investors reacted positively to the loan sale to JPMorgan.

Also read: Fitch cuts NYCB's debt rating deeper into junk territory but says outlook remains stable

-Steve Gelsi

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05-15-24 1434ET

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