DBRS Morningstar Confirms New York Community Bancorp, Inc. at BBB (high); Stable Trend

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of New York Community Bancorp (NYCB or the Company), including the Company’s Long-Term Issuer Rating of BBB (high). At the same time, DBRS Morningstar upgraded NYCB’s short-term ratings to R-1 (low) from R-2 (high). DBRS Morningstar also confirmed the ratings of its primary banking subsidiary, New York Community Bank (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is A (low), while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

KEY RATING CONSIDERATIONS
The upgrade of the short-term ratings at NYCB reflects DBRS Morningstar’s view that regulated banking organizations, including their holding companies, are being held to high liquidity standards commensurate with the notch higher rating on our Short-Term scale.

The ratings confirmation and maintenance of the Stable trend reflects NYCB’s efficient operation and low credit risk loan portfolio, which is focused primarily on rent-controlled/stabilized multi-family buildings in New York City. With consistent cash flows and low vacancies, this multi-family portfolio has exhibited very low, through-the-cycle credit costs and should help insulate the Company from the upheaval in New York rental market.

The ratings also consider NYCB’s limited revenue diversity, reliance on wholesale funding, and a deposit mix geared toward rate-sensitive, non-transaction accounts, as well as its geographically concentrated loan book that includes some larger exposures. The funding mix results in a liability-sensitive balance sheet, which pressures earnings during periods of rising rates, but also benefits earnings as rates decline. The Company has some net interest margin (NIM) tailwinds in the current rate environment, as higher cost borrowings and CDs reprice to lower rates over the next few quarters.

RATING DRIVERS
Over the longer-term, sustained levels of better-than-peer earnings generation, greater revenue diversity and an improved funding profile would result in an upgrade of ratings. Conversely, a significant weakening in asset quality or financial performance would result in a ratings downgrade.

RATING RATIONALE
Despite the impact of the current operating environment and the implementation of CECL, returns at NYCB have been improving, including a ROA of 0.78% in 2Q20. The Company’s structurally liability-sensitive balance sheet is benefiting from the current rate environment, as wholesale funding and CDs reprice. Reflecting this and contrary to most banks, in 2Q20, the NIM climbed 17 bps linked-quarter to 2.18%. Additionally, NYCB experienced double-digit income before provision and taxes (IBPT) growth.. The tailwinds from lower rates is expected to continue, as $12.7 billion of CDs (WAR of 1.69%) and $1.6 billion of wholesale borrowings (WAR of 1.74%) mature over the next four quarters and are replaced with lower cost funding. The Company’s cost savings program, plus a higher NIM, should lead to further efficiency ratio improvement from already industry-leading levels. Looking forward, we expect that well-contained expenses, lower funding costs and sold loan growth will drive solid levels of net interest income, a lower efficiency ratio and improved operating leverage for the rest of 2020.

NYCB’s asset quality remains pristine, with nonperforming assets and net charge-offs remaining at very low levels. NYCB’s asset quality metrics have exhibited superior results over many credit cycles and remain a key underpinning of the Company’s ratings. DBRS Morningstar views this as reflective of the Company’s conservative underwriting, as well as the highly predictable cash flows from its niche, rent controlled/stabilized multi-family lending product that accounts for about two-thirds of the loan portfolio. This underwriting will be further tested in the current downturn, although government assistance programs, including rent subsidies and focus on non-luxury rent regulated buildings should help insulate the Company from the expected downturn in NYC real estate. We do note that approximately 15% of the loan portfolio has taken advantage of the Company’s six-month loan deferral program although we expect this was borrowers being cautious and expect that the majority of these loans will remain performing once the deferral period ends.

NYCB remains somewhat reliant on wholesale funding, primarily FHLB advances secured by its loan portfolio, to fund the balance sheet. Additionally, the deposit mix is heavily tilted towards CDs and non-transaction accounts. As a result, NYCB’s cost of funds is higher than peers. Capital levels are sound, including a Common Equity Tier 1 ratio of 9.8% at June 30, 2020. Limiting capital flexibility, DBRS Morningstar notes that the Company has a large dividend payout ratio.

NYCB, a multi-bank holding company headquartered in Westbury, New York reported $54.2 billion in assets as of June 30, 2020.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

The Grid Summary Grades for NYCB are as follows: Franchise Strength – Good; Earnings Power – Strong/Good; Risk Profile – Strong/Good; Funding & Liquidity – Good; Capitalisation – Good.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020): https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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