New York Community Bancorp has great potential and ambitions (NYCB)

New York Community Bancorp (NYSE:NYCB) is a $4 billion bank that has gone through substantial struggles due to concerns about its liquidity. The company worked hard to repair its portfolio, narrowly avoiding bankruptcy, but obviously investors were burned in the process. As we will see throughout this article, the company has the ability to generate substantial returns for shareholders.

New York Community Bancorp Transition

The company is working on transitioning its bank, with a full board transformation and many new senior executives.

The company managed 5.6% growth in deposits, indicating panic among its customers has subsided, and has a CET1 ratio of 11%. The company has continued to use strategic sales and divestitures to improve its overall asset portfolio, and the company has massive liquidity against uninsured deposits (deposits that are likely to a run).

The company is working hard on loan review and the ACL (allowance for credit losses), which we will discuss in more detail later, is close to 1.8%. This transition is essential for the company.

Cessation of Community Bancorp of New York

The company was able to sell $6.1 billion worth of mortgage loans at breakeven, adding 70bps to the CET1 ratio and helping to clean up the portfolio.

The company plans to repay the wholesale loans and work to fund future loan growth. The company’s mortgage servicing business also adds 60bps to the CET1 ratio, again helping its overall business. The sale has an all-cash sale price of $1.4 billion at year-end, with the strength of the business demonstrated by $1.2 billion in assets sold at a premium to book value.

New York Community Bancorp Capital

The company has improved substantially over the past few quarters and is now stronger than its peers.

The company’s CET1 ratio increased by more than 2% over the past 2 quarters and went from slightly below its peers to well above. The company’s cash and securities/assets are well above the $50-100 billion of bank assets in its competition. Most importantly for the company, the percentage of its insured deposit has increased dramatically.

This is a massive risk to the company and the chance of a run on the bank.

New York Community Bancorp Forecast

The company is forecasting a massive improvement in its bank in the coming years.

Specifically, the company expects diluted EPS to rise to $2.05, a level that would put the stock’s current price at a P/E of ~5. The company plans to keep its CET1 ratio roughly constant as the company’s efficiency ratio also improves. The net result of the company’s efforts here is its TBV per share rising to more than $20/share, putting the company’s current P/B at

Given the company’s share price, this is a strong potential multi-bagger if the company can achieve what it has set out to do.

There are a few key things the company needs to do. It needs to reduce expenses while increasing net interest income by about 40%. This is potentially difficult to achieve in a market where rates are rising more and other banks have high yield offers for depositors. The company also needs to reduce its provision for loan losses.

The company is spending heavily there, but hopes a cleaned-up balance sheet will help it substantially, allowing its net interest margin to rise to 2.85%. This is key to the company’s earnings forecasts and its ability to generate future shareholder returns. It’s a lofty ambition with minimal detail on how it will be achieved, which is a risk.

Bancorp Community Loss Allowance of New York

The company is working hard to revise its investment loans ($74.6 billion) against $79 billion in total deposits.

The company has reviewed the vast majority of its loans here, with approximately 75% of loans reviewed and the company focusing on further de-risking. Multifamily lending remains the largest segment of the company’s business, and it is critical for the company to clarify its segment here. Of note, however, real estate remains strong.

This segment for the company is much less risky than the company’s commercial real estate business, which has been affected by the changing trends after COVID-19.

The company’s multifamily business totaled 1.7% to $618 million, strong QoQ growth. This business which is 75% revised is now much closer to being in a good position. The largest segment for the company’s ALLL is commercial real estate, particularly office businesses, excluding owner-occupied, which has an allowance of 6.62%.

Most of the drop in allowance came from the company charging off 9.9% of its loans. Fortunately, the company’s total office portfolio is $2.8 billion, which makes the high loss rate for the company less risky and shows a more diversified business. The company has seen many struggling loans get current and is working hard here.

The $1.32 billion allowance for loan losses will help cover the vast majority of the risk the company faces after strong growth in 2024, and the company expects that to remain stable. The company currently has $1.94 billion in non-accrual loans, which is sizable, but something the company can afford to deal with, not counting partial recoveries on many of those loans before par.

Overall, strong improvement here will allow the company to continue to drive shareholder returns over the next few years as an improved portfolio frees up cash for other goals.

The thesis risk

The biggest risk to our thesis is the massive transition the company they work for is going through. This is a massive endeavor with a lot of moving parts, and the company needs to do it without losing faith in the company it has worked so hard to build. Whether he can do that remains to be seen over the next few years.

Conclusion

New York Community Bancorp has been going through a tough time. However, the company is still a strong bank with a strong portfolio of assets. It has worked hard to manage its deposits and clean up its bad loans, while generating strong interest income. A potential rate cut by the Fed could also help net interest income.

The company has some lofty goals and ambitions and, despite the risk, has shown its willingness to work hard and achieve its goals. We believe the company has multi-bagger potential given its strong asset portfolio, however, whether this materializes remains to be seen. Let us know your thoughts in the comments below.