New York Community Bancorp: Bullish For The Long Term, But Loan Modifications Raise Near-Term Concerns (NYSE:NYCB)

New York Community Bancorp: Bullish For The Long Term, But Loan Modifications Raise Near-Term Concerns (NYSE:NYCB)

New York Community Bancorp, Inc. (NYSE: NYCB) reported earnings of $0.21 per share in the second quarter, up from $0.20 per share in the first quarter of 2020. The increment in earnings was attributable to net interest margin expansion and lower provision expense. Earnings will likely continue to increase in the remainder of the year because of loan growth. Moreover, the margin will likely expand further on the back of a decline in costs while yields remain sticky. Consequently, I’m expecting the earnings to increase by 13% in the second half of the year compared to the first half. For the full year, I’m expecting NYCB to report earnings of $0.87 per share, up 13% from last year. The June 2021 target price suggests a high upside from the current market price; hence, I’m bullish on NYCB for a holding period of one year. However, I’m less positive on the stock for the near term. A disconcertingly large portion of loans is under modification programs, which shows that NYCB is facing high credit risks. These risks will likely restrain the stock price in the next three to four months; therefore, I’m adopting a neutral rating for the near term.

Loans Requiring Modifications Pose Credit Risks

The second quarter’s company releases show that NYCB is facing greater credit risk than I previously anticipated. As mentioned in the second quarter’s investor presentation, around 11.7% of multi-family loans and 32.5% of commercial real estate loans were under loan modification programs at the end of the last quarter. In total, NYCB allowed payment deferrals on around 14% of the loan portfolio that was facing debt servicing problems. Further, the state of New York has one of the highest unemployment rates in the country, which poses credit risks. According to the latest U.S. Bureau of Labor Statistics release, New York’s unemployment was at a high level of 15.9% in July.

On the plus side, the loan-to-value ratio of the multi-family portfolio is still at a satisfactory level of 57%, as mentioned in the presentation. Moreover, the management mentioned in the second quarter’s conference call that rent collections were quite strong, despite the headlines with regards to other lenders. NYCB focuses on non-luxury, rent-regulated buildings that tenants are unlikely to want to leave.



Overall, however, I believe the credit risks are quite high. I’m expecting the provision expense to continue to decline in the year ahead but remain above normal. I’m expecting NYCB to report a provision expense of $27 million in the second half of the year compared to $38 million in the first half and $7 million in full-year 2019.

Decline in Funding Cost and Yield Stickiness to Drive the Margin

NYCB’s net interest margin, NIM, increased by 18bps quarter-over-quarter in the second quarter following the 150bps federal funds rate cuts. NYCB’s loan portfolio is primarily fixed-rate based with a weighted average life of less than three years, as mentioned in the presentation. Additionally, the management mentioned in the conference call that overall spreads in the multi-family market are still very strong, which means that new loans will originate at high rates. As a result, I’m expecting yields to be quite sticky through 2021.

Moreover, the maturity of expensive term deposits and borrowings will reduce the funding cost through the mid of 2021. According to details given in the second quarter’s 10-Q filing, around $11.6 billion worth of Certificates of Deposits, representing 27% of total interest-bearing liabilities, will mature in the second half of 2020 and first half of 2021. Moreover, around $1.8 billion of borrowings, representing 4% of total interest-bearing liabilities, will mature through the mid of 2021.

Considering the factors mentioned above, I’m expecting NIM to expand by 9bps in the third quarter and 6bps in the fourth quarter of 2020. My estimates are less optimistic than the management’s guidance given in the conference call. The management expects NIM to expand by double-digits in each of the remaining two quarters of 2020. The following table shows my estimates for yield, cost, and NIM.

New York Community Bancorp Net Interest Margin

Loan Growth to Drive Earnings

NYCB’s loan balance remained stable in the second quarter, showing no growth from the end of the first quarter of 2020. Loans will likely resume growing in the remainder of the year as indicated by a robust pipeline. The management mentioned in the conference call that NYCB had a loan pipeline of $2.2 billion. Further, low interest rates will likely boost demand for multi-family real estate loans. The management mentioned in the conference that it expects low-mid-single digit loan growth. Overall, I’m expecting the year-end loan balance to be 2% higher than the balance at the end of June 2020, and 3% higher than the 2019-end balance. The following table shows my estimates for loans and other balance sheet items.

New York Community Bancorp Balance Sheet Forecast

Expecting Full-Year Earnings of $0.87 per Share

The expected NIM expansion and loan growth will likely increase earnings in the remainder of the year. Consequently, I’m expecting earnings to increase by 13% in the second half of the year compared to the first half. For the full year, I’m expecting NYCB to report earnings of $0.87 per share, up 13% from last year. The following table shows my income statement estimates.

New York Community Bancorp Income Forecast

Actual earnings may differ materially from estimates because of the uncertainties surrounding the COVID-19 pandemic. NYCB is currently facing a high level of credit risks that may lead to a surprise in the provision expense.

Bullish for the Long Term, Cautious for the Near Term

I’m using the historical price-to-tangible book, P/TB, multiple to value NYCB. The stock has traded at an average P/TB multiple of 1.30 in the first half of 2020. Multiplying this P/TB ratio with the June 2021 forecast tangible book value per share of $8.4 gives a target price of $10.9 for the mid of next year. This target price implies an upside of 21% from NYCB’s September 2 closing price. The following table shows the sensitivity of the target price to the P/TB multiple.New York Community Bancorp Valuation Sensitivity

Apart from the price upside, NYCB is also offering a leading dividend yield of 7.5%, assuming the company maintains its quarterly dividend at the current level of $0.17 per share. The chance of a dividend cut is low because the earnings and dividend estimates suggest a payout ratio of 70% for the fourth quarter and 66% for 2021, which is in line with NYCB’s payout history. Additionally, NYCB was well-capitalized at the end of the last quarter, with a tier I capital ratio of 11.06% compared to the minimum regulatory requirement of 6.0%. Based on the high upside and attractive dividend yield, I’m bullish on NYCB for a holding period of one year.

I’m less optimistic about the stock price in the near term because of NYCB’s high credit risk. The high unemployment in New York and the large portion of loans requiring payment deferrals in the total portfolio have elevated the credit risk NYCB is facing. The stock price is likely to remain subdued until the company reports a decline in loan modifications. Hence, I’m adopting a neutral rating on NYCB for the near term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: This article is not financial advice. Investors are expected to consider their investment objectives and constraints before investing in the stock(s) mentioned in the article.


Originally published on Seeking Alpha

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