As the one-year anniversary of Silicon Valley Bank approaches, it seems that there may be another "black swan" flying out of the US banking industry
Market data shows that the stock price of New York Community Bank plummeted for the second consecutive day on Monday. As two of the world's three major rating agencies downgraded the rating of this struggling regional bank over the weekend, the bank's borrowing costs may further increase.
As of the close, New York Community Bank fell more than 23% worldwide on Monday, and its stock price plummeted to its lowest level since 1996. Previously, the stock had plummeted 26% last Friday. Prior to last Friday's sharp decline, New York Community Bank had just disclosed on Thursday that its management had "discovered significant deficiencies in the company's internal controls related to internal loan reviews," and the bank suddenly announced a change in CEO.
Currently, Fitch has downgraded the rating of New York Community Bank to non investment grade. Moody's, which has already rated the bank as junk, further downgraded its rating last weekend.
According to a statement released last Friday, Fitch has decided to downgrade the long-term issuer default rating of New York Community Bank from BBB - to BB+, one level lower than investment grade. Fitch Ratings stated that the deficiencies discovered by New York Community Bank are prompting it to reconsider its control over reserve adequacy, particularly in its concentrated commercial real estate risk exposure.
Moody's further downgraded the issuer rating of the bank from junk to B3, down from the previous Ba2 rating. Moody's believes that due to the credit risk of office loans, New York Community Bank may have to further increase its credit loss provisions in the next two years. The institution also pointed out that there is a significant repricing risk in its multi household loans.
David Chiaverini, an analyst at Wedbush Securities Inc., pointed out in an interview that the downgrade has put pressure on the capital costs of community banks in New York.
New York Community Bank performed better than other regional banks in 2023, but its market value has evaporated by more than two-thirds since the beginning of this year. After the bank announced a significant reduction in dividends and an increase in loan loss provisions in its Q4 financial report in January, its stock price began a sharp decline.
The fear of deposit outflow has begun
Industry insiders suggest that as the credit rating of New York Community Bank is continuously downgraded in a short period of time, the company may need to pay a higher price to retain deposits.
According to analysts tracking New York Community Bank, the downgrade may trigger the bank's contractual obligations to commercial clients, who previously required the bank to maintain an investment grade deposit rating. If a depositor's bank goes bankrupt, although the Federal Deposit Insurance Corporation (FDIC) provides protection for each depositor, the maximum insurance amount they can receive is only $250000.
Currently, analysts and investors are most concerned about the deposit status of New York Community Bank.
Last month, the New York Community Bank reported that as of February 5th, it had $83 billion in deposits, of which 72% were insured or mortgaged. But these data were from before Moody's first began to downgrade the bank's rating, which sparked speculation that deposits may flee in the future.
Moody's rating downgrade may affect funding in at least two areas: one is "Banking as a Service" (BaaS). As of May last year, a regulatory document stated that New York Community Bank had a deposit amount of $7.8 billion in this business area; Another is the mortgage custody department, which has deposits ranging from $6 billion to $8 billion.
Citigroup analyst Keith Horowitz stated in a research report on February 4th that if the rating is downgraded, BaaS will face potential risks.
KBW analyst Chris McGratty also pointed out when discussing a rating downgrade, "If a contract is signed with depositors that must achieve an investment grade rating, theoretically this would be a triggering event."
At present, it is uncertain what measures New York Community Bank will be required to take if it violates investment grade regulations in the contract, and it is also uncertain whether multiple rating companies need to downgrade their ratings in order to trigger contract terms.