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New York Community Bancorp talks as though it has turned a corner. A day after the embattled regional bank received a $1bn lifeline from a consortium of big name investors led by former US Treasury secretary Steven Mnuchin, management spoke of the “beginning of a new chapter” and building a “fortress balance sheet”.
Such ebullient proclamations look premature. The deal is great for the new investors, highly dilutive for existing shareholders and will provide some temporary relief to NYCB’s capital needs after its acquisition of Signature Bank pushed its assets above the $100bn regulatory threshold. But the issue of NYCB’s concentrated loan exposure to rent regulated properties remains. Further capital raises and asset disposals cannot be ruled out.
Under the terms of the deal, NYCB is selling common and convertible preferred shares to the new investors at a 38 per cent discount to its closing price on Tuesday. The jump in NYCB’s share price since Wednesday’s announcement means the group has already made a paper profit of more than $1bn on its initial $1.05bn investment, according to Lex calculations. The new investors have also essentially bought 40 per cent of NYCB at a third of the company’s book value.
The upside for the bank is a cash infusion that will give an immediate boost to NYCB’s capital ratios: its common equity tier one ratio will increase to 10.3 per cent while the total risk-based capital ratio will go up to 13 per cent.
All that assumes NYCB does not take further losses or writedowns on its commercial real estate loan portfolio. About 44 per cent — or $37.2bn — of NYCB’s loan book is multi-family housing properties. Of this, about half are buildings in New York City that are subject to rent regulations in one form or another.
Laws put in place since June 2019 have hit the value of these properties. Borrowers are struggling to refinance or sell their properties. At NYCB, over two-thirds of its $18.2bn NYC rent-regulated loan book is due to mature between this year and 2027. It said last month that 14 per cent of this loan book is considered “criticised” or at risk of default. Any losses on potential loan sales would in turn weigh on CET1.
One silver lining for NYCB is that 80 per cent of its deposit base is either insured or collateralised. Logically, this should keep deposit levels steady. In practice, the bank disclosed on Thursday that deposits have dropped more than $4bn, or by about 5 per cent, since the start of the year. Deposit flight remains a real risk.
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