New York Community Bancorp, Inc.’s NYCB Long-Term Issuer Default Ratings (IDRs) were recently downgraded to BB from BB+ by Fitch Ratings. Nonetheless, the rating outlook remains stable.
The primary reasons behind the downgrade were NYCB’s weak earnings and profitability, along with execution risk associated with its restructuring plan.
Principal Factors Driving the Downgrade
Declining Profitability: The rating downgrade comes after the release of its first-quarter earnings. Results showed a significant rise in provisions, higher funding costs and elevated nonrecurring expenses, which are expected to affect near-term earnings. The result affected the profitability, leading to a net loss in the first quarter of 2024. The bank is not expected to return to a normal level of profitability until 2026.
Transforming Business Profile: NYCB’s recent hires show an executive team who have experience consistent with a Category IV bank. This new team will help implement procedures and controls appropriate for a bank of its size. Although management has outlined a credible restructuring plan, the improvement of NYCB’s credit profile will depend heavily on successful execution, especially during the current economic volatility.
In the near term, the bank needs to prioritize employee retention, given that a significant number of employees, who left the bank, joined through the Signature transaction. Until now, the outflow of deposits resulting from these employee turnovers has been relatively small at $200 million. However, the pressure to retain both talent and deposits will be a challenge in an environment of intense competition for both.
Deteriorating Asset Quality: The significant rise in provisions for credit losses, along with a noticeable rise in non-performing loans indicates the weakening of asset quality.
After evaluating a significant part of its commercial real estate (CRE) portfolio, the bank now has a better understanding of the magnitude of potential deterioration. This is evidenced by the $315 million set aside for provisions in the first quarter of 2024, along with the guidance of higher-than-normal provisions throughout the year. Fitch Ratings expects that these losses will gradually come to light and, in total, are likely to be higher than its competitors.
Conclusion
New York Community’s acquisitions have fortified its balance sheet, positively impacting its NII and margins. However, the bank’s asset quality deteriorated considerably and is likely to keep declining in the upcoming quarters, given its exposure to CRE loans and uncertain macroeconomic conditions. This substantially hurt its financials and led Fitch Ratings to downgrade the company’s ratings.
Over the past six months, shares of NYCB have plunged 61.3% against the industry’s growth of 4.1%.
Image Source: Zacks Investment Research
Currently, NYCB carries a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Rating Action on Other Banks
Last Month, JPMorgan Chase & Co’s JPM outlook was upgraded to positive from stable by S&P Global Ratings. However, the A-/A-2 ratings of the holding company and the A+/A-1 operating company ratings have been kept unchanged.
The strength of JPM’s extensive lending-to-trading business, which has outperformed its peers, is the primary reason behind the outlook upgrade.
In February, Fitch Ratings took action by downgrading Truist Financial Corporation’s TFC IDRs to A from A+, alongside lowering the Viability Rating to a from a+. The rating agency viewed this transaction as a near-term credit positive but acknowledged the constraints this narrower business mix places on Truist’s business and earnings prospects. Meanwhile, Moody’s placed TFC’s long-term ratings on review for downgrade.
Top 5 Dividend Stocks for Your Retirement
Zacks targets 5 well-established companies with solid fundamentals and a history of raising dividends. More importantly, they have the resources and will to likely pay them in the future.
Click now for a Special Report packed with unconventional wisdom and insights you simply won’t get from your neighborhood financial planner.
See our Top 5 now – the report is FREE >>
JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report
New York Community Bancorp, Inc. (NYCB) : Free Stock Analysis Report
Truist Financial Corporation (TFC) : Free Stock Analysis Report
To read this article on Zacks.com click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
