New York Community Bank, a regional lender, is facing increased pressure as one of its key ratings was downgraded for the second time in a month, potentially leading to higher costs to retain deposits.
Moody’s Investors Service lowered the deposit rating of NYCB’s main banking subsidiary by four notches to Ba3 from Baa2 late Friday, placing it three levels below investment grade. This downgrade follows a two-notch reduction by Moody’s earlier in February.
Analysts tracking the company suggest that the downgrade could trigger contractual obligations from NYCB’s business clients, who may require the bank to maintain an investment grade deposit rating. Consumer deposits at FDIC-insured banks are covered up to $250,000.
NYCB has experienced a significant decline in its stock value, which began when it reported an unexpected fourth-quarter loss and increased provisions for loan losses. Concerns escalated last week after the bank’s new management identified “material weaknesses” in its commercial loan review process. Shares of the bank have plummeted by 73% this year, including a 23% decline on Monday, now trading at less than $3 per share.
Of particular concern to analysts and investors is the status of NYCB’s deposits. Last month, the bank reported having $83 billion in deposits as of February 5, with 72% of those insured or collateralized. However, these figures precede Moody’s ratings downgrades, raising speculation about potential deposit flight since then.
Moody’s ratings cuts could impact funds in two key areas: NYCB’s “Banking as a Service” business, holding $7.8 billion in deposits as of a May regulatory filing, and its mortgage escrow unit, housing between $6 billion and $8 billion in deposits.
Analysts have highlighted potential risks to servicing deposits following the downgrade. NYCB executives previously indicated that a four-notch decline in the deposit rating could pose a risk, a threshold surpassed by the recent downgrades.
While it remains unclear how NYCB’s contracts respond to breaching investment grade status, replacing lost deposits could involve raising brokered deposits, issuing new debt, or borrowing from the Federal Reserve’s facilities, all likely at higher costs.
