Moody’s downgrades New York Community Bancorp to junk

Moody’s Investors Service said on late-Tuesday that it had downgraded New York Community Bancorp Inc (NYSE:NYCB) to junk, coming just a week after the beleaguered regional bank posted steep losses tied to its commercial real estate loans.

Moody’s downgraded all long-term and some short-term ratings of NYCB to Ba2 from Baa3, and also downgraded its lead bank, Flagstar Bank, to Baa2 from A3. The ratings agency said the firm still remained on review for further downgrade.

A “junk” rating is usually attached to any instrument rated Ba1 or lower by Moody’s.

The Moody’s downgrade comes just a week after NYCB logged a steep fourth-quarter loss and slashed its dividend amid increased provision for losses in its commercial real estate loan portfolio. The bank’s shares had plummeted to 26-year lows, losing roughly 60% of their value in less than a week.

Moody’s said that Tuesday’s move reflects “multi-faceted financial, risk-management and governance challenges facing NYCB.” The ratings agency flagged increasing risks to NYCB from high interest rates, which, coupled with high inflation, were ramping up costs for owners of rental properties, which make up a bulk of the bank’s loan portfolio.

This was apparent in NYCB’s annual provision for credit losses, which surged over 500% to $833 million from $133 million in 2022. With U.S. interest rates set to remain higher for longer, NYCB is expected to see little relief in the near-term.

The ratings agency also noted that NYCB’s liquidity position was much weaker than its peers due to higher dependence on wholesale funding and a smaller pool of liquid assets.

The downgrade to junk could also now potentially impact NYCB’s ability to issue more debt.

Moody’s said that a loss of depositor confidence now presented the greatest risk to NYCB, which could further strain the bank’s liquidity position. An upgrade of NYCB’s rating in the next 12-18 months also appeared unlikely, Moody’s said.

NYCB’s unexpected quarterly loss echoed back to fears of a U.S. banking crisis in 2023, where the failure of Silicon Valley Bank and New York’s Signature Bank (OTC:SBNY) had raised concerns over a broader collapse in regional banks.

NYCB had bought some of Signature Bank’s assets last year.