New York Community Bancorp (NYCB) faced a significant drop in its stock value this week, causing concern among investors. The bank reported an unexpected loss, along with a reduction in its quarterly dividend and an increase in loan-loss reserves.
Despite the market reaction, Wall Street analysts have come to the defense of NYCB. J.P. Morgan analyst Steven Alexopoulos described the stock's decline as an exaggerated response and recommended taking advantage of the current valuation.
In his recommendation published on Thursday, Alexopoulos stated, "Not only do we maintain our Overweight rating, but NYCB remains our top pick for 2024." He further emphasized that at 60% of tangible book value and five times his earnings estimate for 2025, NYCB's stock was trading at half the valuation of its regional peers. With the stock closing at $6.04 on Friday, there is a potential 90% upside to his price target.
While NYCB's earnings surprise has affected bank stocks across the board, Alexopoulos reassured investors that this does not necessarily reflect the situation for other regional banks. He noted that NYCB's capital and liquidity adjustments were necessary due to its merger growth, which led to the bank holding over $100 billion in assets.
Another analyst from Raymond James, Steve Moss, also attempted to allay investors' concerns in a note published on Friday. Moss held a conference call with NYCB's CEO, Thomas Cangemi, and other executives and found comfort in their comments about the stability of deposits.
Moss predicted that following the announced increase in reserves, NYCB's loan-loss provisions would be lower this year. He also anticipated a slight narrowing of the bank's net interest margin to 2.5% in 2024, compared to 3% in 2023. However, NYCB executives aim to restore the profit margin to 3% beyond this year. Moss's forecasts for NYCB include a net income of 92 cents per share in 2024 and $1.05 in 2025.
Overall, despite the recent challenges faced by NYCB, analysts remain optimistic about the bank's potential and encourage investors to consider taking advantage of the current market conditions.
NYCB Shares: A Closer Look
NYCB shares have started to draw attention for their relatively low value. Analyst Moss notes that they currently trade at just 60% of book value, a remarkable discount. Additionally, with the stock trading at only 5.8 times his 2025 earnings forecast, it's not hard to see why investors might be intrigued.
While Moss acknowledges the stock's appeal, he ultimately remains cautious and maintains his Market Perform rating. He believes that investors have already adjusted their expectations for NYCB shares, potentially limiting the stock's upside.
Interestingly, Moss wasn't always so skeptical. Just a few weeks ago, he actually upgraded his rating to Buy. However, recent developments seem to have shaken his confidence.
NYCB's recent surprises have even had a negative impact on other major banks. The KBW Nasdaq Bank Index fell by 5% at one point on Wednesday, partially due to the shock caused by NYCB. Chris Kotowski of Oppenheimer, an analyst who follows and recommends large banks like JPMorgan Chase and Goldman Sachs, was certainly unimpressed.
In a recent note, Kotowski criticized the comparison between NYCB and the big banks. He argued that the two groups are fundamentally different in terms of their loan portfolios and risk profiles. According to Kotowski, a sizable 73% of NYCB's loans are related to real estate, particularly commercial real estate. In contrast, this figure is much lower for the large banks he follows, with only 12% of loans being related to commercial real estate.
Kotowski also highlighted the discrepancies in loan loss allowances. On average, the big banks maintain allowances for loan losses at around 1.7%. In contrast, prior to a significant reserve boost, NYCB only had an allowance of 0.72% of its loans.
This divergence between NYCB and the larger banks seems to reflect the fragmented nature of the U.S. banking industry. Kotowski points out that interstate banking only truly began in 1994, leading to a proliferation of small banks with undiversified loan portfolios. In his view, this business model is fundamentally flawed and urgently needs consolidation.
In conclusion, NYCB's cheap valuation has caught the attention of analysts and investors alike. However, caution remains warranted due to the bank's recent setbacks and the unique challenges it faces compared to its larger counterparts.
