Joseph Otting, the newly appointed CEO of New York Community Bancorp, is confident that the ailing bank has a "fortress balance sheet" after
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"There's a lot of wood left to chop to turn the bank around for good," David Smith, an analyst at Autonomous Research, said Thursday. "But I think there's some hope among the investor base that has not really been there the last few weeks."
The $114 billion-asset company was light on key details of its go-forward plan, with executives saying they will provide more information in next month's earnings report, after the new management team gets a fuller grasp of the bank's issues. Still, it was a far different picture from Wednesday, when the company's survival appeared to be in question.
Mnuchin and Otting, two former Trump administration officials who earlier earned big returns from their turnaround of OneWest Bank, led the $1.05 billion investment into New York Community. The deal, which isn't subject to regulatory approval, is slated to close Monday.
Some short-term actions are underway as Otting, the former Comptroller of the Currency, prepares to take the helm next month. The bank's quarterly dividend,
A deep dive into the health of the firm's loan portfolio, which has a large concentration in multifamily loans, including loans on rent-regulated apartment buildings in New York City, is ongoing.
A key question in the market now is whether $1 billion is enough to cover New York Community's eventual losses. Alessandro "Sandro" DiNello, who has been leading the company since early February, said on a Thursday morning call with analysts that the capital raise will put the bank on track to "improve earnings and profitability."
"That's why we raised capital, right?" DiNello said. "All the people that I've spoken to in the last month, the first question is always about credit. We want to put to bed the concern that we can't handle whatever that might be."
The fresh capital restored at least some immediate confidence in the company following a month-long downward spiral in which its stock price fell some 80%.
Chris Marinac, an analyst at Janney Montgomery Scott, said Thursday that he thinks the capital was enough to set New York Community on the right track. He argued that the company could have gone without the capital raise from a financial standpoint, but it needed a show of confidence to settle investors. On Thursday, the share price climbed 5.8% to $3.66.
While the immediate issues seemed to have been quelled, some observers still see a possibility that the bank will eventually need more capital.
"That's very much to be determined, because there are a lot of fundamental issues with that multifamily portfolio," said Jeff Davis, managing director at Mercer Capital's financial institutions group.
Chris Whalen, the chairman of Whalen Global Advisors and a New York Community stockholder, said the value of the bank's apartment-related loans has dropped by a "mind-boggling" amount thanks to tougher rent regulations in New York state.
"One way or another, they're going to sort this out," Whalen said. But he argued that more aggressive action, such as an acquisition by a larger bank, may be needed.
The incoming management team indicated on Thursday that the future New York Community will look far different than today's version.
The bank has long been concentrated in multifamily loans and other commercial real estate credit, even after recent acquisitions that added some diversification. Otting, who is a seasoned banker in addition to being a former top regulator, said he thinks the right mix of loans should be one-third each in three loan buckets: consumer, business and commercial real estate.
"My interpretation of today's events is … they're going to keep the company probably at a similar size," Janney's Marinac said. "Largely because the real task here is to diversify."
New York Community's $37.2 billion multifamily book, half of which was exposed to the rent-regulated real estate market as of the end of last year, has been a core source of investor concern as declining property values and rising interest rates have made the loans riskier.
However, Otting and DiNello said that they aren't overly worried about New York Community's loans in the rent-regulated sector. DiNello explained that though the riskiness of those assets has increased — about 14% of the loans were categorized as being at risk in the company's latest earnings report — there aren't any delinquencies in the portfolio.
Borrowing JPMorgan Chase CEO Jamie Dimon's turn of phrase, Otting and DiNello said the capital infusion helps establish a "fortress" balance sheet that provides a cushion against credit blips. But it will come at a cost to existing shareholders, since the equity outstanding in the company will double, diluting the current owners' positions.
New York Community shareholders have long been expecting that a capital raise will lead to major dilution, said Davis of Mercer Capital. Many bank investors faced similar situations back in 2008 and 2009.
"The more [capital] you raise and the lower the price, the more dilution there is, and the more the current price has to go down to factor that in," Davis said. "This is how it should be. The common shareholders, the existing ones, are absolutely creamed."
Beyond the financial benefits, this investment group's decision to inject new capital and appoint a new management team is a boon to the stock, said Autonomous Research's Smith.
Still, after the company's $552 million loss provision in the fourth quarter shocked the market, it's unclear how much New York Community will need to set aside for risky loans moving forward.
The bank also needs to
Otting, the former head of the agency that is now the bank's primary regulator, said that shrinking the bank's assets under $100 billion is an option, but that the bank isn't ready to make a decision.
"We will come back with the vision of the way we see the future of the bank," Otting said. "We just need a little bit more time to be able to do that."
The company disclosed Thursday that its deposits fell by 7% in the last month. Its leaders argued that the losses were relatively small in light of the headline-grabbing stock price declines.
DiNello said that after "everything this company has been through over the last two months," the fact that there wasn't more deposit outflow is an indication of resilience.
Although Fitch Ratings and Moody's Investors Service both recently downgraded New York Community to below investment grade, DiNello said the bank was able to get waivers from the agencies to keep holding custodial deposits, which otherwise could have gone elsewhere because of restrictions on the ratings of the banks that can hold them.
Otting added that the company intends to accelerate conversations with the ratings agencies this month to see whether the influx of capital justifies upgrades to the company's credit ratings.
DiNello, who's taking back his former role of non-executive chairman, said that the bank will aim to be transparent during its first-quarter earnings call in April, after management has had a couple of months to evaluate the situation.
"These capital deals come together very quickly," DiNello said Thursday. "To think that we could possibly come to you today and say, 'Hey, here's how everything is going to be going forward,' that would be unrealistic. The key thing is that we've got the capital in place, and now we can, in fact, put together a strategy that makes sense."
