A day after New York Community Bank shares plunged, investors are trying to figure out whether the pain is over and how quickly the Long Island-based company can rebound.
Several bank analysts said on Thursday they were optimistic about what’s next for the parent company of Flagstar Bank, which has nearly doubled its assets since the third quarter of 2022 following successive acquisitions. Others have expressed doubts about the health of the company’s massive apartment construction loan portfolio amid its growing pains.
Jefferies and Compass Point Research & Trading both downgraded the stock, while Moody’s Investors Service placed the company’s rating on review for a downgrade.
What’s clear is that although New York Community’s shares ended the trading day down 11.3%, the health of the $116.3 billion company looked more certain than it did the day before.
“It feels like it’s starting to stabilize, and I actually think it’s a great opportunity to own the stock right now,” Piper Sandler analyst Mark Fitzgibbon said in an interview Thursday.
One year after three area banks failed—
“We expect improving profitability to take several years, while credit risk remains an open issue,” Jefferies analyst Casey Haire wrote in a note to clients.
Under the leadership of CEO Thomas Cangemi, New York Community
Cangemi has been CEO for four months
New York Community completed the Flagstar transaction in December 2022. Then, last March, as the banking crisis unfolded, it acquired a majority stake in the failed Signature Bank.
The deal pushes the New York community toward the $100 billion asset threshold, subjecting it to a set of tougher capital and liquidity rules from regulators. There was some uncertainty Thursday about whether the New York community’s fourth-quarter capital accumulation actions, such as whether dividend cuts were driven by regulatory feedback or at the bank’s discretion.
“I think what people are trying to figure out is to what extent they heard something from regulators and [whether] That has changed recently,” Autonomous Research analyst David Smith said in an interview Thursday. “It’s difficult for any bank to talk publicly about regulatory issues, so in some respects we’re all left speculating.”
“The end result is that New York communities have to take some painful actions. [in the fourth] One quarter and next year, faster and more positive than expected before yesterday,” he added.
The bank did not respond to a request for comment Thursday.
Analysts say that while there is clear pain in the short term, there are also opportunities ahead. Flagstar’s mortgage business was already faltering as high mortgage rates dampened activity, but it thrived once rates dropped. At the same time, the bankers it hired from Signature can help expand its business and consumer lending in the growing New York market.
The problem, some observers say, is that its traditional business of multifamily lending in New York neighborhoods, which accounted for 44% of the portfolio as of the end of December, could be in more trouble. Many of the company’s buildings are subject to rent control, facing tighter state regulations on New York lending and high interest rates that put pressure on landlords.
Historically, its multifamily loans have performed well, with little risk of borrowers not paying back their loans.
But a research note from Moody’s analysts said “this cycle may be different.” Analysts at Moody’s believe that higher interest rates will make it difficult to refinance loans and exacerbate the pain experienced by homeowners due to rising maintenance costs. They say rent controls mean properties have less wiggle room to raise rents for tenants.
New York community executives said they foresee some “repricing risk” in their multifamily portfolios, or are trying to adjust to higher interest rates. Their more cautious tone helps explain why they set aside about $552 million in the fourth quarter to protect against loan defaults, up from just $62 million three months ago.
But they also expressed confidence, with Chief Financial Officer John Pinto saying Wednesday that the bank “remains very pleased with the quality of its multifamily portfolio.”
Bank of America analyst Ebrahim Poonawala said investors don’t necessarily disagree, but they need to see some “evidence” of the portfolio in the coming quarters It can indeed be maintained.
“That’s the uncertainty factor. That’s why the stock fell again today,” Poonawalla said.
Analysts said at least some of this week’s sales were tied to dividend-focused funds. Some of these funds have rules that say they can’t invest in companies that cut their dividends, so they automatically sell their positions in the New York community. Piper Sandler’s Fitzgibbon said the bank has long been a “darling” of dividend investors.
On Wednesday, New York Communities cut its quarterly dividend from 17 cents per share to just 5 cents.
Analysts believe the dividend cut is temporary and will help the bank build a larger capital buffer and meet tougher rules faced by banks with more than $100 billion in assets.
But while the bank’s move was sudden and spooked some investors, some analysts still believe the bank took proactive action, even if its actions may not please the market.
“If they said, ‘Here’s a four-quarter or longer plan to do all of this… and make sure our business continues to grow, I think investors would yawn and say, ‘Do it all now,'” ” said Christopher Marinak, an analyst at Jenny Montgomery Scott. “I think they wanted to be on par with the reserves and instead of fighting it or taking it slow, they said, ‘Let’s just do this.'”