The Impact of Moody’s Ratings Cuts on New York Community Bank

New York Community Bank recently faced a significant blow as Moody’s Investors Service slashed the deposit rating of NYCB’s main banking subsidiary by four notches, to Ba3 from Baa2, marking it as three levels below investment grade. This downgrade has serious implications for the bank, as it could trigger contractual obligations from business clients of NYCB who require the bank to maintain an investment grade deposit rating.

Following the downgrade, NYCB found itself in a stock freefall, which began when it reported a surprise fourth-quarter loss and steeper provisions for loan losses. The concerns were further exacerbated after the bank’s new management discovered “material weaknesses” in the way it reviewed its commercial loans. As a result, shares of the bank have plummeted by 73% this year, trading for less than $3 apiece.

One of the most critical areas of interest for analysts and investors is the status of NYCB’s deposits. Even though the bank reported having $83 billion in deposits as of February 5, with 72% of them insured or collateralized, there is speculation about a possible flight of deposits following Moody’s rating cuts. This could particularly impact the bank’s “Banking as a Service” business and its mortgage escrow unit, which hold billions in deposits.

Analysts like Citigroup’s Keith Horowitz have raised concerns regarding the potential risk of servicing deposits in the event of a downgrade. NYCB executives have acknowledged that the bank’s mortgage escrow business must maintain an investment grade status. They highlighted that deposit levels in the unit fluctuated between $6 billion and $8 billion, posing a significant challenge in light of the recent ratings cuts by Moody’s.

Despite the challenges posed by the ratings cuts, NYCB has not provided immediate responses to inquiries from news outlets. Analysts suggest that to replace deposits, the bank may resort to raising brokered deposits, issuing new debt, or borrowing from the Federal Reserve’s facilities. However, these strategies would likely come at a higher cost, making it more challenging for NYCB to fund its balance sheet effectively.

The impact of Moody’s ratings cuts on New York Community Bank cannot be understated. The bank faces a precarious situation as it grapples with the consequences of the downgrade, potential flight of deposits, and increased costs of retaining funds. As NYCB navigates these challenges, it will be essential for the bank to reassess its strategies and strengthen its financial position to weather the storm caused by the recent ratings cuts.