Regional bank hit with 3rd credit downgrade as crisis concerns linger

New York Community Bank (NYCB) was hit with its third credit downgrade as fears linger that the regional bank could be in peril nearly a year after the regional banking sector was hit by a crisis that triggered some of the largest bank failures in U.S. history.

Morningstar DBRS on Thursday downgraded NYCB’s credit rating and cited “outsized” exposure to commercial real estate (CRE) that the bank has pledged to reduce in the months ahead. CRE borrowers have been under pressure due to the higher interest rate environment as well as lower occupancy rates due to the rise of remote work.

The downgrade comes after rating agencies Fitch and Moody’s also lowered NYCB’s ratings in the last week. Last Friday, Fitch cut NYCB’s rating from BBB to BBB-, its lowest investment grade rating, while Moody’s lowered NYCB’s rating to Ba2, a non-investment grade or “junk” tier, on Wednesday. 

“Liquidity appears sufficient, but given the bank failures last spring, we remain cautious given that the adverse headline risk, including a significant decline in NYCB’s stock price, could eventually spook customer and depositor confidence,” Morningstar DBRS said of its downgrade.

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Investors’ concerns about NYCB came to a head last week after the company posted a surprise loss and announced a dividend cut to boost reserves required by banking regulations, along with its exposure to the CRE market. Those worries sent the bank’s stock plunging to its lowest level since 2000.

NYCB’s management has tried to bolster investor confidence as the company’s stock has fallen over 59% in the last month, including a more than 6% decline during Thursday’s trading. Newly-appointed executive chairman Alessandro DiNello said Wednesday that NYCB will consider the sale of loans in its commercial real estate portfolio or let them run off the balance sheet naturally.

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The lender also indicated that if necessary, it would consider shrinking its balance sheet by selling non-core assets to shore up its common equity tier 1 ratio, a key measure of financial strength.

Treasury Secretary Janet Yellen said during a hearing Thursday that she expects additional stress and some financial losses due to weakness in the CRE market, but that banking regulators are working with banks to address those risks.

NYCB set aside more capital to meet regulatory requirements for capital and liquidity that came into effect after the bank surpassed the $100 billion in total assets threshold.

NYCB was founded in 1859 and has long served as a small regional bank. Between 2000 and 2023, it completed 13 acquisitions to grow to its current size. 

Among those acquisitions was Signature Bank, which failed during last year’s regional banking crisis. It also recently acquired Flagstar Bank, which allowed it to expand its footprint around the country.

Last year’s regional banking crisis saw some of the largest bank failures in U.S. history. First Republic Bank’s failure became the second largest, trailing only Washington Mutual’s failure in 2008 and surpassing the 2023 failures of Silicon Valley Bank and Signature Bank.

Reuters contributed to this report.