Contagion or Opportunity? NYCB Stock Trades at 1996 Prices

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It’s been almost exactly a year since talk of regional-bank contagion hit the headlines, and now it’s back with a vengeance. Perhaps it’s only a coincidence, but the implications and/or opportunities may be even more far-reaching this time around.

Last year, the targets of heated discussion were Silicon Valley Bank, Signature Bank and First Republic Bank. In early 2024, it’s New York Community Bancorp (NYSE:NYCB) that needs a bailout. Now after a sharp drop-off in NYCB stock, some investors may be wondering whether this is a good time to buy the dip.

From savior to potential failure

There’s a twist of irony here, as New York Community Bancorp was once considered Signature Bank’s potential savior. However, the tables have been turned, and now it’s New York Community Bancorp that needs a rescue mission. The company’s fourth-quarter financial press release revealed a shocking net loss of $193 million, versus net income of $266 million in the prior quarter.

Furthermore, New York Community Bancorp cut its per-share quarterly dividend from 17 cents to just 5 cents. Soon afterwards, Moody’s lowered the bank’s credit rating to “junk” status.

While retail investors dropped NYCB stock like a hot potato, interestingly enough, a number of insiders bought up shares. They may regret that decision now though, as New York Community Bancorp shares took an additional 25% haircut on March 1.

It’s bizarre to see NYCB stock technically trading in penny-stock territory now, as it’s below the $5 level. This was almost unimaginable in late 2023, when NYCB shares sat comfortably at around $10.

Yet, the downfalls of Silicon Valley Bank, Signature Bank and First Republic Bank were also widely unexpected. However, it’s hard to compare New York Community Bancorp with those other regional banks since the circumstances are quite different.

With Signature Bank and the others that failed last year, the main issue centered around excessive investments in cryptocurrency and/or government bonds. When cryptocurrency and bond prices both fell, Signature Bank and a few other regional banks couldn’t “pass the stress test,” so to speak.

This reminds me of an old Warren Buffett quote about how you’ll see who’s swimming naked when the tide goes out. Now it’s New York Community Bancorp that’s apparently swimming without any clothes on.

“Material weakness” points to deep trouble

New York Community Bancorp might not have over-leveraged itself on cryptocurrency and/or government bonds like Signature Bank and the others did. However, its current problems don’t seem to be easily fixable.

Here’s some language that ought to scare away any prospective buyers. New York Community Bancorp management identified “material weaknesses in the company’s internal controls related to internal loan review, resulting from ineffective oversight, risk assessment and monitoring activities.”

Those words come directly from the bank itself, not from a reporter’s interpretation of management commentary. If that isn’t startling enough, New York Community Bancorp also disclosed that CEO Thomas Cangemi is leaving, to be replaced by Executive Chairman Alessandro DiNello.

DiNello’s appointment doesn’t come without controversy. In a Feb. 25 letter, New York Community Bancorp Director Hanif “Wally” Dahya declared that he “did not support the proposed appointment” of DiNello as the bank’s chief executive.

As if that’s not enough, a filing reveals a new (or at least, newly disclosed) $2.4 billion “goodwill” impairment charge for New York Community Bancorp. As the old saying goes, that’s a “fine how-do-you-do.”

It’s too soon to definitively declare that New York Community Bancorp will be the next Signature Bank. Yet, the signs of trouble are difficult to ignore.

At least investors can take some comfort in Wedbush analyst David Chiaverini’s suggestion that the bank’s troubles might not metastasize into banking-sector contagion.

“NYCB’s problems are mostly idiosyncratic to itself because of its outsize exposure to rent-regulated multifamily loans,” Chiaverini assured investors.

That’s nice to hear, but it shouldn’t quell investors’ concerns about New York Community Bancorp. At the very least, it will take some time before DiNello can demonstrate his fitness as the company’s new CEO.

Finally, bear in mind that a low share price isn’t the same thing as a great value, and falling knives aren’t always meant to be caught. Thus, as long as the negative news keeps on coming for New York Community Bancorp, there’s no discernible reason to go on a dip-buying expedition with its stock.

Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.