New York Community Bancorp: Valuation Compelling For The 7.2% Yielding Bank (NYSE:NYCB)

It’s been some time since we wrote about New York Community Bancorp Inc. (NYSE: NYCB). In the final protection, we gave it a purchase move and instructed buyers play it defensively via in-the-money buys. This got here again was the proper name general as NYCB produced weak whole returns, roughly consistent with the S&P 500 (SPY).

We assessment the setup at the moment in gentle of the lately permitted merger with Flagstar Bancorp Inc. (NYSE: FBC) and let you know why we’re pushing this for a purchase order.

Q3-2022

Investors could have been slightly upset by the third quarter numbers as NYCB missed estimates. Adjusted third-quarter 2022 earnings of $0.31 have been a penny beneath analysts’ estimates. It additionally fell from $0.35 within the second quarter and signaled that peak earnings have been nicely within the rearview mirror. This was regardless of a continued growth of NYCB’s mortgage portfolio.

The growth was in NYCB’s major area, low-risk, low-value loans to many households.

The statistics right here proceed to be extraordinarily conservative. This is regardless of the hire regulation guidelines.

Interestingly, the business lending portfolio shrank as lending didn’t preserve tempo with funds.

Finally. specialty financing continued to ship and we noticed one other quarter of implausible mortgage progress. Total credit score of $4.519 billion for the third quarter of 2022 was 3.2% larger than for the second quarter of 2022.

While these numbers seemed good, the crux of the matter for the banking sector within the third quarter was the fast flattening of the curve. Long-term charges rose, however short-term charges rose with a vengeance. A very good indicator of that is the distinction between the 10-year and 3-month Treasury yields.

You can see that this quantity was over 1% on the finish of Q2-2022. At the tip of Q3-2022, we have been seeing it at about 0.4%. Things bought worse after that. As of this writing, on the finish of November 2022, the unfold has gone strongly adverse with the 3-month Treasury invoice outperforming the 10-year by 0.73%. This is a really hostile surroundings for many financial institution loans and NYCB is not going to be immune from this. We noticed this already in a comparatively good quarter. Net curiosity revenue shrank by 9% from Q2-2022. While curiosity revenue elevated by 9%, curiosity bills elevated by 61%.

You will be certain there may be rather more to it as banks have a tendency to lift charges on late deposits.

Merger of Flagstar Bancorp

While Q3 2022 outcomes have been underwhelming, FBC was lastly permitted to merge with NYCB.

Completion of NYCB’s acquisition of Flagstar is anticipated to happen on December 1, 2022, topic to the satisfaction of the remaining customary closing situations set forth within the merger settlement between the 2 corporations. The firm will proceed to be often known as New York Community Bancorp, Inc. and can commerce underneath the image “NYCB”.

The acquisition would create one of many largest regional banks within the nation, working 395 branches in a nine-state franchise, together with robust bases within the Northeast and Midwest and publicity to high-growth markets within the Southwest and West Coast. Through the Flagstar Mortgage division, the Company will function nationally via 81 retail residence mortgage places of work in 26 states and a wholesale community of roughly 3,000 third-party mortgage originators.

Source: Seeking Alpha

This was fairly a delay in comparison with the unique timeline (the merger was introduced on April 26, 2021), nonetheless, buyers have been possible comfortable to place this uncertainty behind them. The NYCB-FBC tie-up will create extra scale within the Northwest markets and there are excessive hopes that it’s going to assist NYCB escape of its lengthy consolidation.

On the date introduced, the transaction was anticipated to be 16% accretive to NYCB’s earnings per share in 2022. Of course, all of that’s pushed to 2023, however analysts have a really completely different tackle the place earnings are headed now.

Of course, that is all about the place the rate of interest curve has moved and has little to do with the union itself. In truth, we do not doubt that NYCB can ship earnings progress and presumably exceed promised synergies. However, the yield curve is the boss right here, and earnings might shrink rather more sharply than analysts at the moment anticipate.

Outlook & Verdict

Efforts to generate a sustainable progress mannequin have been actual for NYCB. This mixed with what was initially a excessive valuation in late 2015 has produced actually poor whole returns.

You can see above the exceptional lag in comparison with the SPY and the Financial Select Sector SPDR (XLF). Another attention-grabbing truth right here is how NYCB’s valuation has modified in comparison with that of JPMorgan (JPM), one other financial institution we cowl. While NYCB moved from 2.40X to 1.15X tangible ebook worth, JPM went from 1.40X to 2.06X.

So that is what it comes all the way down to. If you paid a premium valuation for NYCB in 2015, you are most likely hurting and questioning why you are struggling such poor returns. That mentioned, the financial institution itself has made a little bit of a mistake. Heck, you want 6/5 imaginative and prescient simply to identify unhealthy financial institution loans in recent times.

So this for us is an effective sort of inventory drop. Where the basics are robust and the corporate continues to ship. Contrast that with the worth destruction we have seen in mortgage REITs like Annaly Capital Management Inc. (NLY) and AGNC Investment Corporation (AGNC) which have been Class A price destroyers over the identical timeframe.

We should not pleased with averaging down when the underlying worth is eroding quicker than the inventory value. On the opposite hand, NYCB has truly gotten cheaper. We prefer it right here and price it as a purchase, however we predict buyers must be affected person for sustainable returns. As normal, we took a conservative strategy to our commerce with a particularly defensive coated name.

This is working and we’re on the lookout for alternatives within the coming weeks.

Please notice that this isn’t monetary recommendation. It could appear like it, it might sound prefer it, however surprisingly it isn’t. Investors are anticipated to do their due diligence and seek the advice of with knowledgeable who is aware of their goals and limitations.