Summary
- NYCB is trading at a -17.77% discount to book value, and there are additional metrics that indicate it is undervalued such as their equity to market cap ratio.
- NYCB is generating a 6.75% yield which is fully covered by its 60.18% payout ratio.
- The Flagstar acquisition has closed, which improved NYCB's balance sheet and has positioned them for growth going forward.
In Q4 of 2022, New York Community Bank (NYCB) closed on its acquisition of Flagstar Bancorp, which created one of the largest regional banks in the country. Since 12/28/22, shares of NYCB have appreciated by 19.06% and have finally exceeded the $10 mark. I have been bullish on NYCB as it offers a well-covered 6.75% yielding dividend, and the Flagstar acquisition opens up several opportunities as its transformation to a commercial banking model will help diversify its loan portfolio and funding mix. After reading through the quarterly report and comparing NYCB to its peers, I feel NYCB is still undervalued after the latest run, and investors can generate a strong yield while waiting for additional appreciation. There were mixed reactions after Jerome Powell's speech, while many have made the case that the Fed will need to start cutting rates in the 2nd half of 2023. The Flagstar acquisition significantly increased NYCB's mortgage operations which should see modest tailwinds in the ladder of 2023 if rates start to get cut and mortgage originations pick up. There isn't much to dislike as NYCB has become one of the largest regional banks, strengthened its operations, and is paying a much larger dividend than many in the financial sector.
NYCB's Q4 results were strong given the tough macro and the Flagstar acquisition which was inclusive as of 12/1 boosted the balance sheet.
In Q4 2022 , NYCB generated $172 million in net income compared to $150 million in Q4 of 2021. Net income available to shareholders also increased to $164 million from $142 million YoY. NYCB had its most profitable year in a decade, as it generated $650 million in net income compared to $596 million in 2021. NYCB has been doing a great job in regards to profitability as its net income has from $395 million to $650 million over the previous 3-years. This was also the first time in a decade where NYCB generated in excess of $2 billion of total interest income on an annual basis, which allowed NYCB to record $1.4 billion of net interest income in 2022.
I am expecting 2023 will be a continuation of 2022 for NYCB as they recognize significant synergies from the Flagstar acquisition. NYCB's total assets increased by 43.02% from $63 billion to $90.1 billion, and its total loans increased 40.82% from $49 billion to $69 billion resulting from the Flagstar acquisition. The Flagstar acquisition also increased NYCB's commercial real estate loans by 52% to $10.5 billion and their commercial and industrial loans by 1,402% to $7.9 billion. NYCB's multi-family loans increased 10% in 2022 to $3.5 billion, and its specialty finance loans increased 26% to $4.4 billion. Flagstar bought over $16.1 billion of deposits which in combination with organic growth, NYCB recognized 67% of total deposit growth in 202 2to $58.7 billion.
What's interesting looking into 2023 is that NYCB is projecting that its margins will increase as its closing 69% of its retail home lending offices. NYCB's sensitivity to rate changes has improved, and NYCB foresees additional benefits from the integration and transformation of the Flagstar business. As NYCB moves to an in-branch footprint model rather than having retail home lending offices, it should optimize its mortgage business and improve future profitability. During 2022, Flagstar rightsized its mortgage operations to adjust for market conditions. NYCB will maintain a retail presence within its 9-state footprint and position itself to improve profitability during the mortgage downcycle and benefit from significant upside potential when interest rates become more favorable. NYCB is the 6th largest sub-servicer and the 2nd largest warehouse lender in the country, which sets them apart from many other regional banks.
NYCB still looks undervalued compared to its peers after its recent run
I will be comparing NYCB to the following companies:
- TFS Financial Corporation ( TFSL )
- WSFS Financial Corporation ( WSFS )
- Columbia Financial ( CLBK )
- Huntington Bancshares Incorporated ( HBAN )
- Citizens Financial Group ( CFG )
- KeyCorp ( KEY )
TFSL, WSFS, and CLBK are considered thrift banks and were some of NYCB's largest competitors that were actual banks in the thrift financial sector. Since there weren't many comparable thrift banks by market cap to NYCB, I added some of the well-known regional banks for this comparison. Similar to my other bank articles, I will look at the following metrics:
- Price to Earnings P/E
- A company's P/E ratio is important in comparing with similar firms in the same industry.
- Price to Book P/B
- P/B ratios are commonly used to compare banks, because most assets and liabilities of banks are constantly valued at market values
- Loan Deposit Ratio LDR
- indicates the bank's liquidity.
- Equity to Market Cap
- Valuation the market has placed on the company's equity.
- Tangible book value to market cap
- Tangible book value excludes the value of intangible assets such as goodwill. Intangible assets such as goodwill are not as easy to liquidate as tangible assets, and even though they have value, I believe finding the tangible book value is a more realistic measure of a company's value. I wanted to see how the tangible book value compared to each company's market cap.
- Dividend Yield and Payout Ratios
- Amount of earnings each company pays per share through its dividend and how much of its earnings are paid.
- % difference between tangible book value and share price
- Indicates if the market is placing a positive multiple on a company's equity of discounting it
- Premium to Book
- Discount to book value
- Premium to Tangible Book Value
- Discount to Tangible Book Value
Currently, NYCB trades at the 2nd lowest P/E ratio of the group with an 8.88 P/E. The peer group average is 17.47, and when I extract TFSL, which has a 48.10 P/E, NYCB is still well under the 12.37 P/E peer group average. NYCB seems undervalued from a P/E standpoint.
NYCB is still the only regional bank in its peer group to trade under a P/B of 1. Currently NYCB's P/B is 0.82 which indicates NYCB is undervalued, especially since the peer group average is 1.52.
The LDR ratio has always been on the high side since I started following NYCB. I don't like seeing loans exceed deposits, but that's just a personal preference. NYCB has a LDR ratio of 1.17x which is the 2nd highest in the peer group. We will see over the next several quarters if this metric trends lower.
The peer group has an average equity to market cap ratio of 77.69%. Only two banks, CFG and NYCB have more equity on the books than the market cap of the company. NYCB has the largest ratio at 129.08% as they have an additional $1.99 billion in equity on its balance sheet than its current market cap.
I look at the tangible book value compared to the market cap because I want to see how much of the market cap is covered by tangible book value on the balance sheet. Currently NYCB has 82.04% of its market cap covered by tangible book value which is the most of the peer group. The average market cap covered by tangible book value is 50.88% which indicates that NYCB is undervalued.
NYCB is the only regional in its peer group that is trading at a discount to its book value. It's rare that I find companies trading at a discount, especially banks. Today, NYCB trades at a -17.77% discount to book value, and the average premium for the group is 52.41%.
Tangible book value is more strict than book value as it excludes goodwill and other intangible assets. NYCB is trading at a 21.99% premium to its tangible book value which is the lowest premium of the group. The peer group average trades at a 108.80% premium to tangible book value.
NYCB has the 2nd largest dividend yield in the group at 6.75%. The average dividend yield generated from the peer group is 3.96%. NYCB has one of the largest yields in not just its peer group but in the banking sector.
NYCB's dividend is well covered with a 60.18% payout ratio. Excluding TFSL, NYCB's payout ratio is on the high side, but investors are getting a dividend yield of 6.75% so I am not concerned about the elevated ratio compared to the peer group excluding TFSL.
Conclusion
I am bullish on NYCB as it looks to be undervalued in many metrics compared to its peers. I think that the -17.77% discount to book value is an opportunity which is reinforced by having the largest amount of equity to market cap and tangible book value to market cap ratios in its peer group. I believe that the Flagstar acquisition will prove to strengthen NYCB in 2023 and when the Fed pivots NYCB could tremendously benefit as mortgage originations start to increase. NYCB is generating a solid yield of 6.75% which is fully supported by a 60.18% payout ratio. I think NYCB can appreciate by at least 17.77% and replicate its $12.21 book value in 2023 and the best part is the large dividend investors are being paid while they wait for this to occur. Even though NYCB has bounced off its lows, I think it moves higher in 2023.
For further details see:
New York Community Bancorp: This 6.75% Yielding Regional Is Still On Sale After Q4 Earnings