Moody’s Investors Service has downgraded New York Community Bancorp’s (NYCB) credit grade to junk status, citing multifaceted financial risks and governance challenges. The regional lender recently alarmed shareholders by reducing payouts and bolstering reserves to address troubled loans associated with commercial real estate.
Following the downgrade, NYCB’s stock plummeted approximately 60% to its lowest level since 1997. Last week’s announcement of dividend cuts and reserve increases, prompted by impending capital regulations and acquisitions that expanded assets beyond $100 billion, intensified concerns about the bank’s stability. Notably, the Office of the Comptroller of the Currency exerted pressure behind the scenes, with key risk and auditing executives departing in recent months.
Moody’s emphasized the crucial role of risk and auditing functions as the second and third lines of defense in a bank’s operations. While NYCB stated that the downgrade is not expected to materially affect its contractual arrangements, Moody’s reiterated concerns about the outlook for the bank’s commercial real estate portfolio, earnings, capitalization, and governance.
To address these challenges, NYCB’s CEO, Thomas Cangemi, emphasized efforts to fortify the balance sheet and enhance risk management processes. The bank reported total liquidity exceeding uninsured deposits, with a coverage ratio of 163%. However, Moody’s plans to closely monitor NYCB’s performance and governance practices, with further downgrades possible if credit performance weakens or market funding expands disproportionately.
The rapid expansion of NYCB through acquisitions in the past 18 months elevated its total assets, triggering heightened regulatory scrutiny. Analysts suggest the bank may need to issue additional debt to meet new regulatory requirements, but a junk rating could complicate fundraising efforts.
The downgrade to junk status places NYCB among “fallen angels,” potentially restricting investment from certain money managers. Despite the stock’s recent decline, some analysts see a turnaround opportunity for investors with an appetite for discounted assets. However, broader concerns about real estate exposure have impacted regional bank stocks, with the KBW Regional Banking Index down approximately 12% this year.
In summary, Moody’s downgrade underscores the challenges facing NYCB, highlighting the importance of addressing financial and governance issues to restore investor confidence and stability in the long term.
