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New York Community (NYCB) Rides on Loans, Higher Rates a Woe

New York Community Bancorp, Inc.’s NYCB consistent growth in deposits and net loans, impressive asset quality and manageable debt level will help it withstand any unforeseen economic uncertainty. However, the decline in non-interest income and the rising interest rate environment are likely to have an adverse impact on its financials.

NYCB has shown decent organic growth over the last few years and continues implementing different strategies to maintain its growth. Deposits recorded a five-year (2017-2021) compound annual growth rate (CAGR) of 4.8%, whereas net loans witnessed a CAGR of 4.5% during the same time period. The company remains focused on diversified strategies such as further advancement in its existing borrower base, expansion into banking as a service space and additional partnerships with fintech companies to maintain the growth of deposits.

Manageable expenses and improvement in credit quality are other catalysts for NYCB in the near term.  

Further, New York Community’s efforts to reduce total borrowed funds and improve the cash balance over the past years have strengthened its liquidity position. Further, its times-interest-earned ratio of 4.0 at the second quarter 2022-end improved. It maintains issuer ratings of Baa3, BB+ and BBB from Moody’s, Standard & Poor’s and Fitch, respectively, and a stable outlook, which likely gives an optimistic impression to the debt market. This will enable the company to meet its debt obligations even if the economic situation worsens. Similar to NYCB, Prosperity Bancshares, Inc. PB has manageable debt and a solid liquidity position.

Moreover, the times-interest-earned ratio at the end of the second quarter of 2022 improved. Thus, given its earnings strength and a solid liquidity position, Prosperity Bancshares is expected to be able to continue to meet debt obligations in the near term.

Last year, New York Community announced a deal to acquire Flagstar Bancorp, Inc. FBC for approximately $2.6 billion. As the companies wait for necessary regulatory approvals, the deal has been extended to Oct 31, 2022.

The acquisition of Flagstar Bancorp is likely to advance New York Community’s transformation strategies through geographical and product diversification. Post completion, the combined entity will have total assets worth $85 billion and a network of 400 branches in nine states and retail lending offices spread across 28 states.  

However, the company’s non-interest income has been declining at a CAGR of 27.1% over the last five years, primarily due to its exit from unprofitable mortgage banking and wealth management businesses. Also, waiving certain fees due to the COVID-19 pandemic and the elimination of non-sufficient fees on all consumer and business checking products will restrain the growth of non-interest income in the near term.

Also, as NYCB has a liability-sensitive balance sheet, it benefits from a lower interest rate environment. As the Federal Reserve has already raised interest rates four times this year and more such hikes are expected going forward, the rising rate environment is likely to hurt the company’s net interest margin going forward.

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