According to Moody’s, the downgrade was prompted by the news that the bank experienced a surprisingly high loss on exposure to the commercial real estate market, which it focuses on heavily and is currently not faring well. It also cut its dividend in order to adhere to tougher regulatory requirements.
Moody’s highlighted the fact that one third of the bank’s deposits are currently uninsured and "could face significant funding and liquidity pressure if there is a loss of depositor confidence." This is particularly concerning in light of last year’s events at Silicon Valley Bank, where nervous customers pulled uninsured deposits, causing a major bank run.
Moreover, its losses on property loans are sparking fears of more potential defaults within the real estate market, which could affect other regional American banks as well.
According to Moody’s, New York Community Bancorp does not have enough reserves available to cover any potential loan losses despite putting aside another $500 million in the last quarter.
Fitch also downgraded the bank, although it left its rating inside the investment-grade range.
Shares dropping in wake of downgrade
After the downgrade, shares dropped 17 percent in after-hours trading. NYCB has lost more than half of its market value since it announced its unexpected loss last week. The bank showed a net loss of $252 million in the fourth quarter in last week’s earnings report; the loss comes after reporting a net income of $207 million during the third quarter.
Its losses during the last week have spurred a broader sell-off in regional bank stocks, with the KBW Nasdaq Regional Banking Index dropping 12%.
Credit downgrades like this one can make it even more difficult for NYCB to dig itself out of its current hole by raising its borrowing costs even further.
The bank has been taking steps to reassure investors, enlisting former Flagstar Bank chief executive Alessandro DiNello to serve as an executive chair “to improve all aspects of the bank’s operations” alongside President and CEO Thomas Cangemi.
DiNello told analysts: “The challenge today is not easy. But this company has a strong foundation, strong liquidity and a strong deposit base, which gives me confidence for our path forward.”
He added that they were open to selling “non-core assets” but did not specify which ones he was referring to.
Treasury Secretary tries to downplay commercial real estate woes
Representative Ritchie Torres (D-New York) described the gravity of the situation in a House Financial Services hearing, saying: “A crisis at New York Community Bank would not only destabilize the banking system, it would destabilize the largest multifamily housing market in the United States.”
Commercial real estate has been suffering as a result of loans coming due in a higher interest rate environment and the shift to remote work accelerates, Treasury Secretary Janet Yellen admitted, but she believes it is not time to panic.
“I believe it’s manageable, although there may be some institutions that are quite stressed by this problem,” she said.
However, Federal Reserve Chair Jerome Powell acknowledged in a recent 60 Minutes interview that some smaller banks will “have to be closed or merged out of existence.”
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