New York Community Bancorp Cut To Junk

New York Community Bancorp (NYCB) was again in the headlines yesterday after Moody’s cut its credit rating to junk, saying in the accompanying report that the bank faced “multifaceted” financial risks and governance challenges. Moody’s lowered the company’s long-term rating two notches below investment grade to Ba2, whilst adding that it could go further if conditions deteriorate. Fitch lowered its rating of NYCB to BBB- last week, whilst S&P no longer rates the company at the bank’s request last year.  

The bank’s stock price has fallen over 60% since the start of the crisis, losing about USD4bn in value, with the S&P Regional Banks Index down 12%.  

The news of the downgrade came as Treasury Secretary Janet Yellen told lawmakers, at the first of two days of congressional testimony this week, that while losses in commercial real estate “are a worry”, US regulators are working to ensure that loan-loss reserves and liquidity levels in the financial system are adequate to cope. 

“I’m concerned,” Yellen answered to a question from senators, “I believe it’s manageable, although there may be some institutions that are quite stressed by this problem”. She was asked specifically about the situation at NYCB However, she sidestepped that question, saying: “I don’t want to comment on the situation of an individual bank, but commercial real estate is an area that we’ve long been aware could create financial stability risks or losses in the banking system, and this is something that requires careful supervisory attention”.  

As we wrote a few days ago, US banks alone hold about USD2.7tn in commercial real estate debt, of which a significant percentage is now underwater.  This could be a canary in the coal mine that we will be keeping a very close eye on.