The sign above the New York Community Bank branch in Yonkers, New York, USA on January 31, 2024.
Fresh Mike | Reuters
Regional Lenders New York Community Bank The company may need to pay more to keep its deposits after a key rating was downgraded for the second time in a month.
Late on Friday, Moody’s Investors Service downgraded the deposit rating of NYCB’s main banking subsidiary by four notches, from Baa2 to Ba3, three notches below investment grade. Moody’s previously downgraded the rating by two notches in early February.
Analysts who follow the company said the downgrade could trigger contractual obligations on NYCB’s counterparties to maintain investment-grade deposit ratings at the bank.
Consumer deposits at FDIC-insured banks are protected up to $250,000.
NYCB found itself caught in a stock price freefall that began a month ago, when it reported a surprising fourth-quarter loss and higher provisions for loan losses. Concerns intensified last week after the bank’s new management discovered “significant flaws” in the way it reviews business loans. The bank’s shares have fallen 72% this year, including a 19% drop on Monday, and currently trade for less than $3 a share.
Of greatest interest to analysts and investors is NYCB’s deposit profile. Last month, the bank said it had $83 billion in deposits as of February 5, 72% of which were insured or collateralized. But the figures were from the day before Moody’s began a sharp downgrade of the bank, fueling speculation about a possible flight of deposits since then.
Moody’s downgrade could affect funding in at least two areas: Banking-as-a-service business where regulators had $7.8 billion in deposits as of May Archiveand a mortgage escrow unit with deposits between $6 billion and $8 billion.
Citigroup analyst Keith Horowitz said in a February 4 research note: “There are potential risks to deposit services if the rating is downgraded.” NYCB executives told Horowitz that Moody’s would Its A3 deposit rating would have to drop four notches to be at risk. It has dropped six levels since the note was published.
In a conference call on February 7, NYCB Treasurer John Pinto Confirming that the bank’s mortgage custody business needs to maintain investment-grade status, it said deposit levels in the unit have fluctuated between $6 billion and $8 billion.
“If contracts with these depositors had to be investment grade, that would theoretically be a triggering event,” KBW analyst Chris McGratty said of the Moody’s downgrade.
NYCB did not immediately return a call or email seeking comment.
It’s unclear what the contract would force NYCB to do if it violates its investment-grade status, or whether downgrades from multiple ratings firms would be required to trigger the terms of the contract.
To replace deposits, NYCB could raise brokerage deposits, issue new debt or borrow from the Fed’s facilities, but these would likely come at higher costs, McGraty said.
“They will do whatever they can to preserve deposits, but as that happens, it’s likely to become more expensive to fund the balance sheet,” McGraty said.
This story is developing. Please check back for updates.
