New York Community Bancorp Hit Hard By Uncertainty And A Liability-Sensitive Balance Sheet

Conditions have not improved for New York Community Bancorp (NYSE:NYCB) since my last update on the shares. The company’s liability-sensitive balance sheet is a significant vulnerability during a period of rising rates and there is still substantial uncertainty around the proposed Flagstar (FBC) deal – not just in whether the deal will be a synergistic positive, but whether the deal will even happen. On top of that, a high deposit beta and softer loan demand just further worsen the near-term sentiment.

Down about 20% since my last article, NYCB has significantly underperformed regional banks as a group, even though the bank’s core performance hasn’t been quite that bad. At this point, the story remains the same – there are a lot of positive things happening at this bank, but it’s not well-positioned for the current environment and the Flagstar deal remains a huge source of uncertainty. I still see value in the shares, but the underperformance over the last couple of years has been brutal and I can understand why investors may want nothing to do with the name.

 

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New York Community Bancorp Hit Hard By Uncertainty And A Liability-Sensitive Balance Sheet

New York Community Bancorp Idling Until Regulators Wave Green Flag On Flagstar Merger

At this point New York Community Bancorp (NYSE:NYCB) shares remind me of an F1 driver that has to start the race from pit lane; they’re sitting there watching the pack fly by while the company waits for regulators to wave the green flag and clear the transformational merger with Flagstar (FBC). Since my last update, these shares have fallen more than 10%, underperforming regional peers by more than 15%.

I don’t see any evidence that NYCB and Flagstar won’t get that clearance, and that’s key to the bull argument here. While there are several good things going on at NYCB beyond that deal, a liability-sensitive effectively single-market lender is not going to fare well in this market. I still expect the deal to close in 2022, though, and I still believe that the combined bank will generate mid-single-digit core earnings growth that supports a fair value in the $15-16 range today.

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New York Community Bancorp Idling Until Regulators Wave Green Flag On Flagstar Merger

New York Community Bancorp's Flagstar MOE Could Put A Brutal Performance History Behind It

 

There’s no getting around the fact that New York Community Bancorp’s (NYCB) return history over the past decade-plus is brutal. Total returns over the last 15 years are just under 3%/year on an annualized basis, and even if you reinvested the dividends along the way, the 4% return is still quite weak. That said, the average bank hasn’t done any better over that same 15-year period, though you do start seeing a divergence at the 10-year mark that widens to about 8%/year underperformance at five years.

NYCB had a host of problems, but a lot of it stemmed from a management team that clung stubbornly to a monoline thrift business model – lending overwhelmingly to NYC multifamily developers and funding those loans with higher-cost CDs and brokered deposits. That model may be worked when it was a much smaller bank, but it didn’t scale well, and NYCB had an unattractive deposit base, a highly-concentrated loan book, and actual liability sensitivity, making it one of the few banks that would see net interest income negatively impacted by higher rates.

The pending merger of equals with Flagstar (FBC) could be a fresh start for this bank, complementing the change in CEO made less than a year ago. Unlike what most bank management teams pledge, there’s actually real revenue synergy and diversification potential here, though a bear could also argue that it combines two risky businesses with the addition of integration risk. While I want to be at least somewhat skeptical here, it doesn’t take tremendous assumptions to suggest meaningful undervaluation.

 

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New York Community Bancorp's Flagstar MOE Could Put A Brutal Performance History Behind It

Quality And Conservatism At People's United Comes At A Cost

There’s a lot to like about People’s United Financial (PBCT). A leading bank in New England (#4 in deposit share), People’s United services a client base with well above-average household income and has maintained excellent full-cycle credit quality versus its peers. The bank has also had solid success in expanding its lending franchise into the New York and Boston metro markets and has produced some good long-term C&I loan growth numbers. I’d also note that the bank pays a fairly attractive dividend and operates with a conservative financial structure.

There are also things that aren’t so good about People’s United, though, including the company’s persistent below-peer profitability and more limited growth prospects. Loan growth is looking more challenging in 2018 and the bank’s asset sensitivity may not be worth as much if we’re closer to the end of the rate cycle. People’s United has long underperformed regional banks as a group, and while I do see some value here, this is a tougher call given the more diminished growth prospects that I see.

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Quality And Conservatism At People's United Comes At A Cost

Investopedia: M&T Bank In A Rare Class

The meltdown in the banking sector has had some interesting consequences. Nimble banks with fairly clean balance sheets like Bank of the Ozarks (Nasdaq:OZRK) have taken advantage of FDIC assistance to significantly expand their footprint by acquiring failed banks. Once-respected giants like Wells Fargo (NYSE:WFC) and U.S. Bank (NYSE:USB) have seen investors apply major haircuts to their future earnings power, and former winners like Washington Mutual and Wachovia were basically gutted.

Curiously, M&T Bank (NYSE:MTB) has come through this mess relatively unscathed. While sound underwriting certainly helped limit the financial damage, a strong reputation with investors has buoyed the stock price as well. Consequently, it's one of the rare banks out there that does not look like a tremendous bargain at current prices. 


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M&T Bank In A Rare Class (MTB, PNC, FNFG, NYB, HBC, C, SBNY)