Why specifically NY Community Bank?

Why specifically is New York Community Bank (NYCB) the one being tarnished first due to the coming CRE lending debacle? You would think that because NYCB isn’t so heavy in office building CRE, and instead specializes in multi-family CRE, that they would be suffering less than some other banks.

Turns out that it is mostly because of rent stabilization policies. NYCB is the lender with the largest percentage of loans to rent-stabilized apartments. And over the last few years, the costs of owning a rent-stabilized building have gone up substantially more than the rents have been permitted to go up. All sorts of costs have risen dramatically, direct labor, contract labor for maintenance, insurance, interest rates, etc, have all gone up substantially. Meanwhile rents have only gone up a very small amount. The way CRE is valued is almost always as a multiple of the net income. Since the net income is now lower, the value of those properties are now lower. And “the market” is worried that those new low prices are only going to get worse, especially in the rent-stabilized portion of the market (because the owner can’t raise rents to meet the higher costs).

It’s an interesting little wrinkle in the whole CRE lending issue.


My understanding is slightly different. The bank assets went over 100 Billion, remember they have absorbed/ acquired two banks, important one is Signature bank. Regulators are changing their risk weighted model. Compared to any other CRE, the rent may not go up, but the rent is expected to be paid. These loans are not in danger of default like office building.

Separately, I would suggest look into Apartment REIT’s to understand the maintenance cost. They are not that high and haven’t seen significant change.

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  1. This will force the bank to sell certain loans. Anytime you sell anything under duress, you are a price taker, this could potentially result in some loan losses.
  2. When the loans are sold, the corresponding income will go down, resulting in lower NII (net interest income)
  3. The declining stock price will impact deposits and the bank may have to pay-up for deposits, again negatively impacting NII

Net-net, assuming the bank survives, it will be a stronger, better capitalized bank, with better risk profile.

Separately, the regulators are changing the RWA definition and models. This has impacted many banks. For ex, Citi (one name I am little bit familiar) has significantly reduced the RWA, and even completely exit muni insurance market. Why? The reserves the regulators wanted for that business resulted in the business earning low to mid single digits on the capital employed. Citi made a strategic decision to exit the business, because they are trying to improve their return profile to drive their stock price. For Citi, releasing the capital means they can deploy that on buyback more profitably (Citi is trading at .55 TBV).

Banking is a business of confidence and Trust. The regulators action instead of increasing the confidence and Trust, has negatively impacted.

Separately, If regulators wants to fortify the balance sheet of smaller banks, and want banks to deleverage their balance sheet, they can achieve that by making NYCB (for that matter any bank) as an example. However, shrinking credit from the economy has its own impact. Even if they wanted to go after banks with heavy CRE exposure, they should have gone after someone like Zion or Comerica. I guess they decided to choose a small one, so that if there is a bank run they can easily handle.

In any case, if the bank survives and comes out, it will be coming out with stronger balance sheet, better risk profile and earning considerably less.

FWIW, I wanted to buy small # of NYCB @ $3.5 and I missed it, I have an open order let us see. If the bank survives past Feb, and in to March, they have couple of preferred’s, and you may want to consider that. If it goes past Feb, either it continues as stand alone entity or even if it merges the preferreds and equity will not be wiped off. But wait, don’t rush. :slight_smile:


Zions indeed has had to pay up for capital in recent months. Ironically, I have a Zions Bank CD maturing TODAY! :smiley:

I very much doubt that regulators will kill big banks during an election year unless they REALLY have no choice. So NYCB is likely to survive at least through most of this year.

At those prices, it is essentially an option. Not a bad bet IMO.

No they will not. In 60 minutes interview Jay Powell essentially declared big banks are safe,

We looked at the larger banks' balance sheets, and it appears to be a manageable problem. There's some smaller and regional banks that have concentrated exposures in these areas that are challenged.

Separately, the CRE exposure for big banks are not an issue. Amongst the big banks, only WFC has slightly higher exposure, but manageable. (Separately, I own Citi, BAC, WFC, so I checked :slight_smile: ) It is generally the small banks that provide these loans, and often they are concentrated on a region/ sector. Again FED expects… in Powell’s words

I don’t think there’s much risk of a repeat of 2008. I also think, you know, we need to be careful about making proclamations about the – particularly about the future. Things have surprised us a lot. But no, on this, on this, I do think it’s a manageable problem. I think we’re doing a lot to manage it.
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> There will be certainly – there will be some banks that have to be closed or merged out of, out of existence because of this. That’ll be smaller banks, I suspect, for the most part. You know, these are losses. It’s a secular change in the use of downtown real estate. And the result will be losses for the owners and for the lenders, but it should be manageable

So parsing FED Chair’s words, they are expecting they can deal with these issues by first wiping the equity on those loans then by wiping the equity of the lender (banks!!!). They are not expecting significant hit to FDIC or other systemic institutions or economy.

Of course, this is the FED who called inflation transitory, while it is true from a longer context, but at short-term they have failed to move quickly and cut rates. So take their words with a pinch of salt.

Yes and at .3x of TBV.