On Monday, Raymond James issued a downgrade for New York Community Bancorp (NYSE:NYCB) from Market Perform to Underperform, setting a fair value estimate at $3. The firm's revised stance comes with concerns that credit costs may negatively affect the bank's earnings for several years ahead.
The downgrade follows revelations from the bank's annual report, which highlighted significant exposure to interest-only, rent-regulated multi-family loans totaling $7 billion.
The bank's recent $1.05 billion equity raise has aligned its Common Equity Tier 1 (CET1) ratio with that of its Category IV peers, providing some leeway to address credit issues. However, the annual report also confirmed that New York Community Bancorp's underwriting for rent-regulated apartments might have been more aggressive compared to its peers. This strategy was likely adopted to compete against agencies, potentially leading to higher rates and more complex structures.
The aggressive underwriting is expected to lead to costly resolutions impacting pre-provision net revenue (PPNR), especially given the new management's plan to significantly reduce commercial real estate exposure. Additionally, recent disclosures have indicated an unfavorable shift in the bank's deposit base, which could further weaken its earning capacity.
The analyst from Raymond James notes that the tangible book value growth for New York Community Bancorp will likely face challenges for the coming years. This outlook is based on the combination of the bank's strategic decisions and the current financial disclosures, suggesting a cautious future for the bank's financial performance.
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