The downgrade could result in contractual obligations for NYCB’s counterparties to require the bank to maintain an investment-grade deposit rating, according to analysts who track the company.
Consumer deposits with FDIC-insured banks are covered up to $250,000.
NYCB is in the midst of a steep decline in its stock price that began a month ago when it reported an unexpected fourth-quarter loss and an increase in its loan loss reserves. Concerns intensified last week after the bank’s new management found “significant weaknesses” in the way it reviews commercial loans. The bank’s stock price has fallen 72% this year, including a 19% drop on Monday, and is currently trading at less than $3 a share.
A key concern for analysts and investors is NYCB’s deposit status. The bank said last month that it had $83 billion in deposits as of Feb. 5, 72% of which were insured or collateralized. However, this figure came the day before Moody’s began downgrading the bank, and speculation has since grown about a possible deposit flight.
Moody’s rating downgrade could affect funds in at least two areas: the “banking-as-a-service” business, which had $7.8 billion in deposits as of May regulators; filingand a mortgage escrow unit with deposits of $6 billion to $8 billion.
“There is potential risk for service deposits in the event of a downgrade,” Citigroup analyst Keith Horowitz said in a Feb. 4 research note. NYCB executives told Horowitz that the bank’s deposit rating, which was pegged at A3 by Moody’s at the time, was at risk unless it was lowered by four notches. Since the release of this memo, it has fallen six notches.
In a conference call on February 7th, NYCB CFO John Pinto It confirmed that the bank’s mortgage escrow business must maintain investment-grade status and said the unit’s deposit levels fluctuate between $6 billion and $8 billion.
KBW analyst Chris McGratty said of Moody’s downgrade: “If you have a contract with these depositors that says it has to be investment grade, that would theoretically be a triggering event.” .
NYCB did not immediately respond to calls and emails seeking comment.
It is not clear what the contract requires NYCB to do if it violates its investment-grade status, or whether a downgrade by multiple rating agencies is required to trigger the terms of the contract. .
To replace deposits, NYCB could raise brokered deposits, issue new bonds, or borrow from Federal Reserve facilities, all of which would likely be more expensive. Deaf, McGratty said.
“They will do whatever it takes to keep deposits in-house, but the cost of funding their balance sheets could become prohibitive as this scenario plays out,” McGratty said. said.
This story is developing. Please check back for the latest information.
