Moody’s Investors Services downgraded New York Community Bancorp’s credit rating by two notches late Tuesday, lowering into speculative-grade, or “junk” status.
The rating agency cut the rating to Ba2 from Baa3 and said it remains on review for possible further downgrade.
“Today’s rating action reflects multi-faceted financial, risk-management and governance challenges facing NYCB,” Moody’s said in a statement.
The bank is seeking to build its capital but has just taken an unexpected loss on commercial real estate, “which is a significant concentration for the bank.”
NYCB shares
NYCB,
plunged 22% to close at their lowest level since 1997 on Tuesday, and fell an additional 8% in premarket trading Wednesday. The bank immediately moved to reassure investors, saying total deposits have increased in the last several weeks and that it had “ample” liquidity.
The stock has slumped about 60% since the bank posted a surprise quarterly loss last week, and disclosed trouble with its commercial real-estate loans. The company also slashed its dividend to build up capital to meet regulatory requirements.
Also Tuesday, Treasury Secretary Janet Yellen told lawmakers on Capitol Hill that she was “concerned” about risks to the commercial-real-estate market, noting that “there may be some institutions that are quite stressed by this problem.”
The bank ” faces high governance risks from its transition with regards to the leadership of its second and third lines of defense, the risk and audit functions of the bank, at a pivotal time,” said Moody’s.
It added that “control functions with strong knowledge of a bank’s risks are key to a bank’s credit strength.”
Also on Tuesday, the Financial Times reported that the bank’s chief risk officer Nicholas Munson left the bank earlier this year, and said a bank spokesperson had confirmed his departure. The bank did not comment on whether a replacement had been named, the report said, and did not respond to a request for comment from MarketWatch on the matter.
The news stirred unhappy memories of the demise of Silicon Valley Bank last year, when the absence of a chief risk officer contributed to the run on that bank.
“NYCB’s core historical commercial real estate lending, significant and unanticipated loss on its New York office and multifamily property could create potential confidence sensitivity,” said Moody’s. “The company’s elevated use of market funding may limit the bank’s financial flexibility in the current environment.”
The bank is highly exposed to rent-regulated multi-family properties, a segment that has performed well in the past. But this cycle may prove different, given higher interest costs when properties are refinanced and higher maintenance costs due to inflationary pressure.
The bank is also exposed to low fixed-rate multi-family loans, which also face refinancing risk.
NYCB’s provision for loan losses rose 526% in 2023 to $833 million from the prior year. As of Dec. 31, the reserve stood at $992 million, equal to 1.17% of total loans, or 1.26% excluding loans with government guarantees and warehouse loans.
The bank’s share of uninsured deposits was 33% as of year-end and it could face significant funding and liquidity pressure if there is a loss of depositor confidence, said Moody’s.
NYCB has just one traded bond, floating-rate notes that nature in November of 2028. Those bonds fell off a cliff last week, tumbling a full 12 cents to 87.27 cents on the dollar, as the following chart from data-solutions provider BondCliQ Media Services shows.
New York Community Bank notes due 11/06/2028 – Year-to-date performance.
BondCliQ Media Services
Fresh data was not yet available early Wednesday.
NYCB’s stock move, meanwhile, weighed on other regional banks with KeyCorp
KEY,
down 0.7% premarket, Comerica Inc.
CMA,
down 1.5% and Citizens Financial Group Inc.
CFG,
down 0.8%.
The SPDR S&P Regional Banking exchange-traded fund
KRE
was down 1.1%.
