NYCB Will Survive… For Now
Shares of New York City Bank (NYCB) have taken a beating since reporting worse than expected Q4 earnings, primarily as a result of unexpectedly high credit loss provisions ($552 million) related to it’s office and multifamily portfolio. After the earnings announcement on January 31, 2024, the stock traded sharply lower — losing nearly 40% the next day and continuing to fall in subsequent days before recovering last Friday. Given the events of last March’s regional banking crisis are still fresh in investor’s minds, many are wondering — is NYCB headed for receivership? While I am dubious of their long-term fate, I think the immediate existential risk is limited and we will not see a repeat of SVB/FRC in the short term.
Nothing to Fear But Fear Itself
Customers and investors have limited information to operate on during bank stress events, and so naturally they gravitate towards the one thing they can see daily — the stock price. While the stock price means absolutely nothing with respect to a bank’s ability to honor it’s deposits, it’s highly visible and a rapidly declining stock price can become a self-fulfilling prophecy of doom. Customers see the stock price falling, assume their deposits may be at risk, and begin to withdraw en-masse. This setup can ironically cause the risk they were concerned about to materialize.
Bank runs are a funny thing — most of the time there is no risk of failure prior to the run, but the run itself causes the failure. Bank executives know this, and smart ones will do whatever they can to instill confidence in depositors to avoid such a fate. To get out ahead of this — many banks in March provided frequent deposit updates, to prove to the markets (and customers) that the connection between their stock prices and their funding stability was tenuous. NYCB followed the same playbook, issuing a midnight press release on February 6 outlining their deposit activity.
Management: There’s Nothing to See Here
The release showed that as of February 5 deposits remained at $83B, up from the Q4 figure reported on 1/31 of $81.4B. The next morning NYCB also stated that there had been essentially “no deposit outflows from it’s retail branches”, reiterating their strong liquidity position and deposit stability. On its surface this is a compelling announcement, however there are a few issues that have more to do with what was not said rather than what was.
The emphasis on “retail branch deposit” stability is carefully worded, and in my opinion obfuscating. Retail deposits tend to be the stickiest deposits, least sensitive to rates, and least likely to withdraw funds in times of stress. Also does “retail branches” literally mean activity at the branches, or does it include online activity? As we’ve seen with SVB, modern day bank runs take place on an iPhone, not in a bank lobby. So we know that retail branch deposits have been stable (big surprise), OK — well what about the other 2/3 of NYCB’s deposits?
We know that at Q4 deposits were $81.4B, and they were $83.0B on February 5, but that is all we know. How much of that growth was before February 5? What have the flows looked like for non-retail deposits? There just isn’t enough information to definitively whether or not NYCB experienced meaningful deposit withdraws, and I expect that is intentional.
Uninsured Deposits Are Manageable
Assuming management is carefully choosing their words to hide the fact that there have been material outflows, how bad could it be? Probably not enough to sink the ship. Unlike SVB which had nearly all of its deposits uninsured, NYCB has only 28% uninsured or un-collateralized. If we assume all of these funds leave (which is unlikely), NYCB has capacity to fund that $23B outflow from cash and unencumbered securities alone, not even considering the $14B FHLB capacity at their disposal. It is exceedingly unlikely that a deposit run takes down NYCB in the short term, however the cost paid in such a scenario would be steep.
NYCB has a heavy reliance on wholesale funding — $12B of it’s deposits and $21B of FHLB borrowings as of Q4, so roughly 1/3 of it’s overall funding is wholesale. If there were a run on uninsured deposits, the most likely funding source used to replace those deposits would be FHLB (preserving cash for day to day operations and to meet future outflows), which would bring the wholesale funding percentage to > 50%, assuming all uninsured deposits leave. The end result would be survival, but with a $50B wholesale funding noose around NYCB’s neck. These borrowings would be at a spread to treasury, so in the 5% range depending on maturity. This would result in an increase of anywhere between 50 BPS and 120 BPS to the current ~2.87% combined funding cost, depending on which deposit segments below are replaced with the higher cost FHLB borrowings.
Conclusion — Survive But Not Thrive
If a run on uninsured deposits were to play out as outlined above, NYCB would survive but they would pay a high price in the form an untenable reliance on wholesale funding sources, higher funding costs, and compressed NIM. There would almost certainly be regulatory pressure to get the wholesale funding percentage down to a manageable amount, which is no easy task. How would they do it? Raise debt? Preferred equity? Loan Sales? An aggressive CD campaign (already 21% of deposits)? All of this is to say that while the immediate existential risk seems overblown, NYCB has some very real problems and is far from out of the woods. They are dealing with rising funding costs while simultaneously being stuck with low coupon multifamily loans that are half rent controlled, leaving them little room to adjust pricing upon maturity. If rates remain “higher for longer” NYCB may need to restructure it’s balance sheet to remain viable.