Could New York Community Bancorp Be the Next Bank of America?

New York Community Bancorp (NYCB 0.18%) it is not the first bank to run into financial trouble, cut its dividend and accept a bailout. In fact, iconic Bank of America (BAC 1.44%) did each of these things during the Great Recession. But could the future of New York Community Bancorp include a return to the scale that Bank of America achieved?

What went wrong with Bank of America

During the Great Recession, which was a housing-led recession, Bank of America made the ill-fated decision to buy a mortgage lender (Countrywide Financial). That move left Bank of America in a difficult position as the housing market collapsed and homebuyers with poorer credit profiles began defaulting. Bank of America reacted by cutting its dividend and embarking on a bailout. The share price fell. Since that time, the company has successfully returned to fighting form.

Once again, Bank of America is a highly respected industry leader. Stocks have risen dramatically since the worst of the Great Recession. And its dividend is rising again, although it still remains below its pre-cut levels. In general, investors who stepped in during the worst days have done very well with Bank of America stock. This list notably includes Warren Buffett and Berkshire Hathawaythe company he runs.

BAC data by YCharts.

Can you take the story of this bank and apply the same logic to New York Community Bancorp? Maybe, maybe not.

What went wrong with New York Community Bancorp

New York Community Bancorp actually managed to survive the most recent banking upheaval, which featured a series of bank runs and failures. In fact, it bought the assets of one of the failed banks, a move that came shortly after its purchase of peer Flagstar Bank. This pair of trades in a compressed time period appears to be a key part of what got New York Community Bancorp into trouble.

In essence, it went from a fairly small bank to a much larger one, which required more oversight from regulators. New York Community Bancorp was unprepared for the additional oversight and regulatory requirements. And, in a signal, just as the company was beginning to admit that it needed to improve its internal controls, it announced that some large loans it had made had gone sour. It was a very bad look, and Wall Street dropped the stock like a rock.

Dividends were cut, the board brought in new management to improve the bank’s controls, and New York Community Bancorp agreed to a bailout. The $1 billion infusion should give it the wherewithal to survive this period and thrive again in the future. But the change is not expected to be complete until at least the end of 2026. So this is a long-term effort and only patient investors will want to be involved in the change.

NYCB data by YCharts.

In particular, the second quarter earnings announcement was a mix of good operational updates and poor financial results. So investors taking the risk to buy New York Community Bancorp will need to have strong stomachs if they hope to hang around long enough to take advantage of the hoped-for and seemingly under way recovery.

There are many advantages

New York Community Bancorp is down about 70% from its 52-week highs. Even if it doesn’t immediately return to those highs, there’s still significant upside potential here if the bank can demonstrate to investors that it’s on the road to recovery. In this way, it could be a situation like Bank of America after the Great Recession.

However, there is a caveat. Bank of America is one of the largest banks in the US, and New York Community Bancorp is just a regional player. It seems unlikely that the government will step in to help New York Community Bancorp, as it has with big banks like Bank of America. So there is no last resort reservation for New York Community Bancorp. In other words, there’s probably more risk in turning around New York Community Bancorp than there was in the success of Bank of America.