DBRS Confirms New York Community Bancorp, Inc. at BBB (high); Stable Trend

DBRS, Inc. (DBRS) has confirmed the ratings for New York Community Bancorp, Inc. (NYCB or the Company), including the Company’s Long-Term Issuer Rating of BBB (high) and Short-Term Issuer Rating of R-2 (high). At the same time, DBRS confirmed the ratings of the Company’s primary banking subsidiary, New York Community Bank (the Bank). The trend for all ratings remains Stable. The Intrinsic Assessment (IA) for the Bank is A (low), while its Support Assessment is SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

The ratings confirmation and maintenance of the Stable trend reflects NYCB’s solid and resilient level of earnings and its largely low credit risk loan portfolio. NYCB’s niche business of lending primarily on rent-controlled/stabilized buildings in New York City, has exhibited very modest, through-the-cycle credit costs. The ratings also consider NYCB’s limited revenue diversity, reliance on wholesale funding, and a deposit mix geared toward non-transaction accounts, as well as its geographically concentrated loan book that includes some larger exposures.

Following the December 2016 termination of the Astoria Financial acquisition agreement, NYCB developed a strategic plan that has it returning largely to its core business activity of primarily originating for portfolio multi-family and other commercial real estate loans. To that end, the Company recently announced the sale of its mortgage banking business and FDIC-covered assets with all transactions expected to close in 3Q17 and resulting in a $90 million pre-tax gain. While the sale of the mortgage banking operation reduces revenue diversity, DBRS notes that this business added additional volatility and did not significantly add to the bottom line. DBRS notes that the Company continues to prepare for the added regulatory compliance burden of crossing the $50 billion SIFI threshold with any future regulatory relief or shifting of the SIFI threshold to a higher asset size potentially providing some added expense relief.

While the level of NYCB’s earnings remains solid, growth in earnings has been muted as the Company has actively managed its balance sheet to remain below $50 billion in assets. NYCB’s earnings benefit from its low cost operating platform and low credit costs. DBRS notes that volatility in long-term interest rates causes variability in the Company’s customers’ multi-family loan refinancing activity and associated prepayment fees, causing some quarterly fluctuations in the net interest margin (NIM) and net interest income depending on customer behavior. In general, multi-family loan customers move to lock-in rates as interest rates begin to rise. This prepayment activity has helped mitigate asset yield pressure in the low rate environment.

While the Company’s efficiency ratio has worsened in recent years due to the added regulatory expense, as well as the expansion into higher costs business, DBRS views NYCB’s expense base as well-managed, as its multi-family lending platform drives a low cost business model. Indeed, the Company’s efficiency ratio remains far below that of most banks (around 50% in recent periods). The sale of the mortgage business should also lower expenses and improve the Company’s efficiency ratio.

NYCB’s asset quality remains pristine with nonperforming assets (NPAs) at very low levels and net charge-offs (NCOs) virtually non-existent. DBRS notes that the Company’s asset quality metrics have been tested through many credit cycles and have generally outperformed the industry and remains a key underpinning of the ratings. During the most recent cycle, nonperforming assets increased, however losses remained very low, which is typically how NYCB performs during a credit cycle. DBRS views this as reflective of the Company’s conservative underwriting, as well as the highly predictable cash flows from its niche rent controlled/stabilized multi-family lending product that accounts for about two-thirds of the loan portfolio. DBRS notes that NYCB does have a modest exposure to loans secured by New York City taxi cab medallions, which represent about 0.40% of loans held for investment. However, given the pressure on this asset class, these loans represent a disproportionate share (59%) of non-performing loans and losses. DBRS views NYCB’s exposure as highly manageable.

NYCB remains somewhat reliant on wholesale funding, primarily FHLB advances secured by its loan portfolio, to fund the balance sheet. Additionally, the deposit mix is heavily tilted towards CDs and non-transaction accounts. As a result, NYCB’s cost of funds is higher than peers and deposits are likely to reprice at a faster pace in a rising rate environment. DBRS would view favorably a more robust deposit funding profile. Capital levels are solid and include a Common Equity Tier 1 ratio of 11.16% at quarter-end. Overall, capital has been growing, benefiting from earnings retention and minimal growth in the balance sheet. DBRS would expect the Company to manage to lower capital levels if it begins to grow its balance sheet or completes an acquisition.

NYCB, a multi-bank holding company headquartered in Westbury, New York reported $48.3 billion in assets as of June 30, 2017.

The Grid Summary Grades for NYCB are as follows: Franchise Strength – Good/Moderate; Earnings Power – Strong/Good; Risk Profile – Strong/Good; Funding & Liquidity – Good; Capitalization – Good.

RATING DRIVERS
Sustained levels of better than peer earnings generation, greater revenue diversity and a lower level of wholesale funding reliance could result in upward ratings pressure. Conversely, a sustained deterioration in asset quality or an increase in lending risk appetite could pressure ratings. A poorly integrated acquisition or a significant acquisition that results in the Company entering a non-familiar business line could result in downward ratings pressure.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: John Mackerey, Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director – Head of NA FIG
Initial Rating Date: 13 October 2006
Last Rating Date: 2 August 2017

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.