The recent downgrade of the deposit rating of New York Community Bank’s main banking subsidiary by Moody’s Investors Service could potentially lead to higher costs for the bank to retain deposits. The rating was slashed by four notches, bringing it down to Ba3 from Baa2, which is now three levels below investment grade. This downgrade has raised concerns among analysts regarding the obligations of business clients who require an investment-grade deposit rating from NYCB. With consumer deposits at FDIC-insured banks being covered up to $250,000, the bank may face challenges in retaining deposits moving forward.
NYCB has experienced a significant decline in its stock value, with shares falling by 73% this year, including a 23% drop in a single day. This downward trend began when the bank reported a surprise fourth-quarter loss and higher provisions for loan losses. The situation worsened when the bank’s new management identified “material weaknesses” in its commercial loan review process. These developments have raised concerns about the bank’s financial stability and investor confidence in NYCB.
One of the key areas of interest for analysts and investors is the status of NYCB’s deposits, especially after the Moody’s ratings cuts. The bank reported having $83 billion in deposits as of February 5, with 72% of them insured or collateralized. However, given the subsequent rating cuts by Moody’s, there is speculation about a potential flight of deposits from the bank. This could have implications for NYCB’s “Banking as a Service” business, with $7.8 billion in deposits, as well as its mortgage escrow unit, holding between $6 billion and $8 billion in deposits.
Analysts have highlighted the potential risks associated with servicing deposits in the event of a downgrade. Citigroup analyst Keith Horowitz expressed concerns about the impact of a rating downgrade on NYCB’s mortgage escrow business, which requires an investment-grade status to maintain operations. The bank’s CFO, John Pinto, confirmed the fluctuation of deposit levels in the unit and acknowledged the need to uphold an investment-grade rating. There is uncertainty about the contractual obligations that NYCB may have with depositors in the event of breaching the investment-grade threshold.
In response to the challenges posed by the ratings downgrade, NYCB may need to explore alternative strategies to replace deposits. This could involve raising brokered deposits, issuing new debt, or borrowing from the Federal Reserve’s facilities. However, these options may come at a higher cost, potentially impacting the bank’s balance sheet and overall financial performance. Analysts suggest that NYCB will need to take proactive measures to retain deposits, but the cost implications may pose obstacles to this objective.