On Friday, JPMorgan adjusted its outlook on New York Community Bancorp (NYSE:NYCB), reducing the price target to $11.50 from the previous $12.50, while retaining a Neutral rating on the stock. The decision followed the bank's reported second-quarter loss, which was larger than anticipated, primarily due to an increase in reserve build-up and a shortfall on pre-tax, pre-provision (PTPP) income.
The bank's shares experienced a downturn, dropping 3% as its peers saw a 2% increase. This market reaction came after New York Community Bancorp reported a comprehensive review of approximately 75% of its commercial real estate (CRE) portfolio and addressed problematic loans, leading to heightened migration and charge-off activities, particularly in office CRE.
The company's actions resulted in additional reserves and a raised forecast for provision expenses for the years 2024 to 2026 compared to the previous quarter. These developments have underlined the elevated credit risk profile of the company and suggest that the path to achieving peer-level profitability by 2026 may face delays.
Despite the bank's recent strategic moves, such as the sale of $6 billion in warehouse loans and a $1 billion mortgage servicing business expected to close in the fourth quarter of 2024, which should improve Common Equity Tier 1 (CET1) and liquidity, the revised plan still demands considerable effort from the new management. The bank aims to reduce its CRE portfolio to about $30 billion in the coming years, cut costs, and expand its commercial and industrial (C&I) lending while managing deposit outflows.
In light of these challenges, JPMorgan notes that while the company's shares appear inexpensive, trading at 0.57 times the estimated 2024 tangible book value (TBV)—a 61% discount to peers—the continuing uncertainties over the bank's earnings potential and the high credit risk profile necessitate a cautious approach.
In other recent news, New York Community Bancorp has announced a strategic shift towards simplifying its business model and strengthening its balance sheet. The bank has completed the sale of its mortgage servicing businesses and mortgage warehouse loans to Mr. Cooper and JPMorgan Chase (NYSE:JPM) respectively. As a result, the bank's Common Equity Tier 1 (CET1) ratio stands at 11.2%, with an expected increase of 30 basis points pending regulatory approvals.
The recent developments also include a focus on retail banking, residential mortgages, and expansion of commercial and industrial (C&I) businesses, with plans to reprice $7 billion in loans by 2027 to increase margins and decrease commercial real estate concentration. The bank reported a net loss of $333 million for the quarter due to loan loss provisions but expects to close a valuation gap through growth and cost-reduction strategies.
New York Community Bancorp now aims to simplify its balance sheet and reduce operating risk by focusing on commercial lending, relationship banking, increasing core deposits, and generating fee income. The bank plans to continue evaluating and executing non-core activities to realign the balance sheet.
Despite an increase in non-accrual loans and an anticipated decline in net interest margin in the coming quarters, the bank maintains a strong liquidity position and has been successful in raising customer deposits, particularly in the private bank sector.
InvestingPro Insights
As New York Community Bancorp (NYCB) navigates through a challenging period, real-time data from InvestingPro provides further insights into the company's financial health and market position. With a market capitalization of $3.73 billion, NYCB's valuation metrics present a mixed picture. The bank's P/E ratio stands at a negative -0.87, reflecting investor concerns about profitability. Additionally, the price to book ratio of 0.47 suggests that the stock may be undervalued relative to the company's net asset value, which could attract value investors.
InvestingPro Tips highlight critical aspects for potential investors to consider. NYCB has maintained dividend payments for 31 consecutive years, which could be appealing for income-focused shareholders. However, it's worth noting that the bank's net income is expected to drop this year, and analysts do not anticipate the company will be profitable within the same timeframe. The stock has experienced significant price volatility, which could be a concern for risk-averse investors.
For those interested in a deeper analysis, InvestingPro offers additional tips on NYCB, providing a comprehensive look at factors such as cash burn rate and earnings revisions. With the use of coupon code PRONEWS24, readers can get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, unlocking access to these valuable insights. There are 14 additional InvestingPro Tips available that could further inform investment decisions regarding NYCB.
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