Asset: NYCB-PA
Price: $20.25
Rationale:Analysts were surprised by NYCB's 4th quarter loss and massive dividend cut, which was due to (1) a drop in revenue, (2) increased loan loss reserves, and (3) increased capital requirements now that they've crossed over into being a >$100B bank.
NYCB common stock dropped 37.5% and their callable preferred stock fell 14.5% today despite its dividend not being cut. NYCB-PA now yields (1.59/20.25=) 7.85%.
Now let's look at those 3 reasons and ask which are real long-term issues for the business?
#1 is a bad quarter, but hardly a reason for the bank to lose a third of its market cap.
#2 suggests the bank thinks more of their loans will default and net charge-offs rose from 0.03% in the 3rd quarter to 0.22% in the 4th. NYCB is heavily invested in multifamily building loans in New York City, many of which are rent controlled, so those tenants and cash flows aren't going anywhere. Their office portfolio may be riskier, especially if rates aren't cut soon. In response to a $161M increase in charge-offs from Q3 to Q4 the bank increased loss provisions to $490M, leading to a $-252M loss. Had the bank set aside a smaller loss provision, they'd have been profitable. Instead they're stockpiling cash, which increased by $4.56B between the quarters! In addition to meeting capital requirements, I think NYCB is looking ahead to an environment where the BTFP is no longer available and the Fed discount window isn't taking up the slack for overextended lenders. They were rewarded for being opportunistic in 2023, so if the SHTF in 2024 they want to be positioned to either survive loan losses or sweep in and buy more assets, or both. They're preparing a strong defense for... something... but this doesn't necessarily make the bank worth less than a bank leaning hard into risk or a bank with $20B less in assets that wouldn't have to raise cash. Instead, all this cash-raising makes them
less risky. My explanation also describes why revenue decreased - they dialed back on activity to raise capital. So NYCB-A's risk has actually gone down as the yield has gone up. With a bold dividend cut and aggressive loss provisioning, NYCB has probably assured its own survival. Also consider that in a SHTF moment, NYCB might fall back below the $100B regulatory threshold, freeing up billions of dollars to acquire rivals' assets on the cheap.
#3 is simply a growing pain and essentially one-time cost of doing business for a bank that had doubled in size over the past 3-4 years, although higher capital requirements could hurt ROE in the absence of better economies of scale. If the analysts did not foresee the need for NYCB to raise more capital it's their fault, not NYCB's. The bank could avoid these requirements by selling assets until they are only a $99B bank, but I agree with management that it is better for NYCB to grow. They laid the foundation for that growth through the sacrifices of the 4th quarter.
NYCB-PA is callable at $25 after 3/17/2027, which is 23.45% higher than the price this afternoon. In 2027 the bank would have to find an alternative source of long-term capital considerably less expensive than (1.59/25=) 6.36% for a call to make sense. We, on the other hand, can pick up a 7.85% yield on the cheap.
The biggest risk at this point, other than a real estate collapse or severe recession in which the non-cumulative dividend could be cut, would be if an activist investor came in advocating the sale of assets to get below the $100B line and free up billions in reserves. I think NYCB management can make the case they are acting prudently and with growth in mind rather than dividends.
If more banks were willing to slash common dividends to deal with challenges, bank failures would be a lot rarer, and growth more common. So I actually like the courage of NYCB management, and would consider buying from the panicked short-termers.
