Some NYCB deposits may be a flight risk after Moody’s downgrades ratings again

Regional
lender New
York
Community
Bank
may
have
to
pay
more
to
retain
deposits
after
one
of
the
company’s
key
ratings
was
slashed
for
the
second
time
in
a
month.

Late
Friday,
Moody’s
Investors
Service
cut
the
deposit
rating
of
NYCB’s
main
banking
subsidiary
by
four
notches,
to
Ba3
from
Baa2,
putting
it
three
levels
below
investment
grade.
That
followed
a

two-notch
cut
from
Moody’s
in
early
February.

The
downgrade
could
trigger
contractual
obligations
from
business
clients
of
NYCB
who
require
the
bank
to
maintain
an
investment
grade
deposit
rating,
according
to
analysts
who
track
the
company.
Consumer
deposits
at
FDIC-insured
banks
are

covered
up
to
$250,000.

NYCB
has
found
itself
in
a
stock

freefall
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
loans.
Shares
of
the
bank
have
fallen
73%
this
year,
including
a
23%
decline
Monday,
and
now
trade
hands
for
less
than
$3
apiece.

Of
key
interest
for
analysts
and
investors
is
the
status
of
NYCB’s
deposits.
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
slashing
the
bank’s
ratings,
sparking
speculation
about

possible
flight
of
deposits
since
then.

The
Moody’s
ratings
cuts
could
affect
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
mortgage
escrow
unit
with
between
$6
billion
and
$8
billion
in
deposits.

“There
is
potential
risk
to
servicing
deposits
in
the
event
of
a
downgrade,”
Citigroup
analyst
Keith
Horowitz
said
in
a
Feb.
4
research
note.

NYCB
executives
told
Horowitz
that
the
deposit
rating,
which
Moody’s
had
pegged
at
A3
at
the
time,
would
have
to
fall
four
notches
before
being
at
risk.
It
has
fallen
six
notches
since
that
note
was
published.

During
a
Feb.
7
conference
call,
NYCB
Chief
Financial
Officer

John
Pinto
confirmed
that
the
bank’s
mortgage
escrow
business
needed
to
maintain
an
investment
grade
status
and
said
that
deposit
levels
in
the
unit
fluctuated
between
$6
billion
and
$8
billion.

“If
there’s
a
contract
with
these
depositors
that
you
have
to
be
investment
grade,
theoretically
that
would
be
a
triggering
event,”
KBW
analyst
Chris
McGratty
said
of
the
Moody’s
downgrade.

NYCB
didn’t
immediately
respond
to
CNBC’s
calls
or
an
email
seeking
comment.

It
couldn’t
be
determined
what
the
contracts
force
NYCB
to
do
in
the
event
of
it
breaching
investment
grade
status,
or
whether
downgrades
from
multiple
ratings
firms
would
be
needed
to
trigger
contractual
provisions.
For
instance,
while
Fitch
Ratings
cut
NYCB’s
credit
ratings
to

junk
last
week,
it
kept
the
bank’s
long-term
uninsured
deposits
at
BBB-,
one
level
above
junk.

To
replace
deposits,
NYCB
could
raise
brokered
deposits,
issue
new
debt
or
borrow
from
the
Federal
Reserve’s
facilities,
but
that
would
all
probably
come
at
a
higher
cost,
McGratty
said.

“They
will
do
whatever
it
takes
to
keep
deposits
in
house,
but
as
this
scenario
is
playing
out,
it
may
become
more
cost
prohibitive
to
fund
the
balance
sheet,”
McGratty
said.

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