A sign is pictured above a New York Community Bank branch in Yonkers, New York, USA, on January 31, 2024.
Cool Mike | Reuters
Regional financier Community Bank of New York may have to pay more to hold deposits after one of the company’s key ratings was cut for the second time in a month.
Last Friday, Moody’s Investors Service cut the deposit rating of New York City’s largest bank by four notches, from Baa2 to Ba3, placing it three notches below investment grade. This followed a two-notch cut by Moody’s in early February.
According to analysts who follow the company, the downgrade could trigger contractual obligations on the part of NYCB counterparties that require the bank to maintain an investment grade deposit rating.
NYCB is in a stock free fall that began a month ago when it reported a surprise fourth-quarter loss and steeper provisions for loan losses. Concerns intensified last week after the bank’s new management found “material weaknesses” in the way it reviewed its commercial lending. The bank’s shares have fallen 72% this year, including a 19% drop on Monday, and now trade for less than $3 apiece.
Of key interest to analysts and investors is the state of NYCB filings. Last month, the bank said it had $83 billion in deposits as of Feb. 5 and that 72% of those were insured or collateralized. But the figures are from the day before Moody’s began cutting the bank’s ratings, sparking speculation about a possible deposit flight ever since.
Moody’s ratings cuts could impact the funds in at least two areas: a “Banking as a Service” business with $7.8 billion in deposits as of a May regulatory filing, and a deposit unit backing mortgages with between $6 billion and $8 billion in deposits.
“There is potential risk to deposit servicing in the event of a downgrade,” Citigroup analyst Keith Horowitz said in the Feb. 4 research note. NYCB executives told Horowitz that the deposit rating, which Moody’s had set at A3 at the time, would have to drop four notches before it was at risk. He has fallen six steps since that note was published.
During a Feb. 7 conference call, NYPD Chief Financial Officer John Pinto confirmed that the bank’s mortgage escrow business was required to maintain investment grade status and said deposit levels in the unit ranged between 6 and 8 billion dollars.
“If there’s a contract with these depositors that you have to be investment grade, that would theoretically be a trigger event,” KBW analyst Chris McGratty said of Moody’s downgrade.
NYCB did not immediately respond to calls or emails seeking comment.
It could not be determined what the contracts obligate NYCB to do if it were to violate investment grade status, or whether downgrades by multiple ratings firms would be required to trigger the contract provisions.
To replace the deposits, NYCB could raise brokered deposits, issue new debt or borrow from Federal Reserve facilities, but all of this would likely come at a higher cost, McGratty said.
“They will do whatever it takes to keep deposits in house, but as this scenario unfolds, it could become more cost-prohibitive to fund the balance sheet,” McGratty said.
This story is developing. Please check back for updates.