New York Community Bancorp, which is a financial institution that is part of the structure of the American regional banking sector last Tuesday, February 6, faced a serious problem in the form of a credit rating downgrade to junk status, the decision on which was made by experts at Moody’s Investors Service.

Moody’s argues that the deterioration of the mentioned lender’s rating positions is because the bank is currently in a difficult position, which provokes concerns about future prospects. New York Community Bancorp shocked Wall Street last week by reporting losses in the commercial real estate market that came as a surprise.

Moody’s has lowered the credit rating of the financial institution by two notches compared to the previous level. This decision is evidence of significant doubts about the ability of the creditor to repay its debts to the holders.

Moody’s report notes that the potential vulnerability of trust in a financial institution can be triggered by factors such as unforeseen losses of the New York office and multifamily property.

Against the background of news about the downgrade of the credit rating, the indicator of the value of the bank’s shares during the after-hours trading showed the dynamic of the drop, fixed at 17%. This trend was recorded against the background of a sharp 22% sell-off during regular trading.

It is worth noting that the downgrade is a kind of aggravating factor for the situation of those companies that have faced difficulties, due to the subsequent increase in the cost of their borrowings.

Moody’s warned that the financing and liquidity of New York Community Bancorp is viewed as a relative weakness compared to similar organizations. Experts separately noted that in this case, an important circumstance is the sensitivity of the wholesale financing market, which may dry up during a period of stress.

Moody’s also indicated that a third of New York Community Bancorp’s deposits are not insured. Last year, customers who were panic-stricken during the crisis in the regional banking sector in the United States withdrew uninsured deposits from a Silicon Valley Bank. Against this background, the process of classic bankruptcy of a financial institution was implemented.

Moody’s warned that the New York Community Bancorp may face such a sensitive issue as a loss of trust from depositors. If the corresponding negative scenario is realized, the lender will have to register significant pressure on liquidity and financing.

The market value of New York Community Bancorp has decreased by more than half after the bank published information about an unexpected loss a week ago. The financial institution has slashed dividends and spiked reserves for possible loan losses.

Moody’s keeps the credit rating of New York Community Bancorp on review. This decision is a signal of a possible further downgrade of the financial institution’s position.

The amount of unexpected losses of the bank in the fourth quarter of last year amounted to $252 million. In the same period of 2022, the financial institution recorded a profit of $172 million. Also in the last quarter, the bank faced loan losses of $552 million. In this case, the main catalyst for the negative indicator was soured loans for commercial real estate, the value of which fell sharply because more and more people work remotely, which is why companies are abandoning offices.

Thomas Cangemi, CEO of New York Community Bancorp, blamed the unsuccessful fourth quarter of last year on the acquisition of assets worth $40 billion from Signature Bank. As a result of the implementation of this deal, the total assets of the financial institution amounted to more than $100 billion. Overcoming the corresponding level is a landmark for lenders, as it means that banks must set aside more capital to protect against future losses. This requirement is provided for by United States law. At the same time, breaking the $100 billion mark limits the amount of money that financial institutions can use to issue loans.

The immediate reaction of investors to New York Community Bancorp’s reporting for the past quarter was justified and is not a signal that the lender is close to bankruptcy. The corresponding statement was made by David Chiaverini, managing director of Wedbush Securities. At the same time, he noted that a significant decline in the bank’s shares raises concerns. According to David Chiaverini, the corresponding trend increases the likelihood that a financial institution may become the subject of receivership. This means that there is still a risk of bankruptcy, but so far its materialization is not a scenario for the near future.

Uninsured depositors, who are clients that have more than $250,000 in one account, currently have reason to fear that New York Community Bancorp will run out of money to cover their deposits. In the last quarter, the volume of deposits of a financial institution decreased by only 2%, excluding deposits for custody related to Signature Bank.

Analysts at Bank of America, in a note released late last week, noted that feedback received from the management of New York Community Bancorp indicates that the lender does not record any unusual inflows or outflows of deposits.

On Tuesday, US Treasury Secretary Janet Yellen said that her department is in communication with watchdogs and is closely monitoring current banking stress. She also noted the absence of the intention to comment on the situation in a separate financial institution. Janet Yellen said that commercial real estate is an area that can create risks to financial stability or provoke losses in the banking system.

As we have reported earlier, Moody’s Negatively Characterizes Asia’s Sovereign Creditworthiness.