A sign is displayed above a New York Community Bank branch in Yonkers, New York, on January 31, 2024.
Cool Mike | Reuters
Regional Lender New York Community Bank It may have to pay more to retain deposits after one of the company's key ratings was cut for the second time in a month.
Late Friday, Moody's Investors Service cut the deposit rating of NYCB's main banking subsidiary by four notches, from Baa2 to Ba3, placing it three notches below investment grade. This followed a two-notch cut by Moody's in early February.
The downgrade could trigger contractual obligations on the part of NYCB's commercial clients that require the bank to maintain an investment-grade deposit rating, according to analysts who follow the company. Consumer deposits at FDIC-insured banks are covered up to $250,000.
NYCB has found itself in a stock free fall that began a month ago when it reported a surprise fourth-quarter loss and steeper provisions for credit losses. Concerns intensified last week after the bank's new management found “material weaknesses” in the way it reviewed its commercial loans. The bank's shares have fallen 73% this year, including a 23% drop on Monday, and now trade for less than $3 each.
Of key interest to analysts and investors is the status of NYCB deposits. Last month, the bank said it had $83 billion in deposits as of Feb. 5, and that 72% of them were insured or collateralized. But the figures are from the day before Moody's began cutting the bank's ratings, raising speculation about a possible outflow of deposits since then.
Moody's rating cuts could hit the funds in at least two areas: a “banking-as-a-service” business with $7.8 billion in deposits according to a May regulatory filing presentationand a mortgage custody unit with between $6 billion and $8 billion in deposits.
“There is a potential risk to deposit servicing in the event of a downgrade,” Citigroup analyst Keith Horowitz said in a Feb. 4 research note.
NYCB executives told Horowitz that the deposit rating, which Moody's had set at A3 at the time, would have to drop four notches before it would be at risk. It has fallen six points since that note was published.
During a conference call on February 7, NYCB CFO Juan Pinto confirmed that the bank's mortgage escrow business needed to maintain investment grade status and said deposit levels at the unit ranged between $6 billion and $8 billion.
“If there is a contract with these depositors that requires them to be investment grade, in theory that would be a triggering event,” KBW analyst Chris McGratty said of Moody's downgrade.
NYCB did not immediately respond to CNBC's calls or an email seeking comment.
It could not be determined what the contracts obligate NYCB to do if it defaults on investment grade status, or whether rating downgrades from multiple rating firms would be needed to trigger the contractual provisions. For example, while Fitch Ratings downgraded NYCB's credit ratings to trash last week it kept the bank's long-term uninsured deposits at BBB-, one level above junk.
To replace deposits, NYCB could raise brokered deposits, issue new debt or borrow from Federal Reserve facilities, but all of that would likely come at a higher cost, McGratty said.
“They will do what is necessary to maintain internal deposits, but as this scenario plays out, it may become more cost-prohibitive to fund the balance sheet,” McGratty said.
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