2023-05-01 09:00:00 ET
Summary
- NYCB got hit with the panic-selling in the regional bank crisis.
- The bounce back after the Signature deal was strong and the stock exploded upwards on release of strong Q1-2023 results.
- We took the opportunity to exit and we are happy to tell you why.
New York Community Bancorp, Inc. ( NYCB ) got one of our rare bullish ratings. While we stayed away from giving the same treatment to the secondary securities, we did endorse the likely outcome of being long the common shares.
Overall, we think the common shares actually make more sense than either of the secondary securities. We think some more opportunities for defensive covered calls are likely to come up soon if the market tumbles as we expect.
Source: Bond Market Still Clueless
The stock had a sharp tumble post that as the regional banking crisis took hold. Our commentary within our Marketplace Service reiterated that no bank was better designed to survive this turbulence than NYCB. Thanks to the lack of held-to-maturity securities and an ultra-conservative lending platform, NYCB had the best odds of coming out unscathed. The performance of the stock has vindicated our stance. We look at the recent deal to take in Silicon Valley Bank deposits and loans and the Q1-2023 results.
The Signature Deal
From the point of our last article till March 17, 2023, NYCB had done just as well (or just poorly, if you prefer) as the regional banking index ETF ( KRE ).
This of course happens in panics where the baby and bathwater go hand in hand out of the window. That changed as FDIC chose Flagstar to take over the deposits of Signature Bank.
This was a sweetheart deal designed to expediate the process of sorting through Signature's loan book and give NYCB a "can't lose" entry point. Why was NYCB chosen? Well, we can never know exactly what FDIC officials were thinking, but NYCB has been one of the most conservative regional banks and that made them a great choice. The last thing FDIC would want to do is to transfer the risk to another bank that becomes the next Signature Bank. While anything is possible, NYCB has the lowest probability of becoming that. That deal reduced its loan to deposit ratio to 88% from 118% which would be dead last (that's a good thing) in the regional banks. So we are here, after that development and the Q1-2023 results.
Q1-2023
The first quarter reflected the boost from the deal as liquidity went from good to fantastic.
This can be better seen in the next slide.
The goodies that NYCB got from FDIC can be seen in the move in tangible book value per share.
Earnings minus dividends were barely 6 cents, so that is barely accretive quarter after quarter. That jump in tangible book value is pretty much all FDIC. But NYCB also showed in this quarter exactly why they were chosen.
The solid results pole vaulted NYCB higher and created a near 50% gap with the regional banking index over the last two months.
Why We Took The Exit
Before we get to that, let us remind investors that we have chronically sung praises of NYCB even when we did not have a "buy" rating on it. We recognize what the company has done over time and completely understand that our exit could be very premature. That said, we did exit on April 28, 2023.
At the heart of the issue is that the setup for financials as a whole remains very tenuous. We have a lot of data in the pipeline that the recession has started or is very, very close. We have shown a lot of this in our previous work and here is some more recent data.
Deutsche Bank
The exact time remains rather unimportant. What matters is the magnitude and duration. Historically, the Federal Reserve was easing with this level of leading economic indicators and manufacturing indices.
We are going to get at least one more rate hike here and possibly as many as three. With the lag with which these hikes hike, we think equity markets in general and financials in particular will be poor places to be all the way till end of 2024. Do note that Core PCE ran at a 4.9% in the Q1-2023 GDP release.
FRED
That was higher than the previous 3 quarters. So while we think the Fed is close to getting done, don't expect the rate cut cycle to start until equity markets really get blown to smithereens. Circling back to NYCB, we don't think they will be immune. Their losses will rise and possibly quite substantially.
NYCB outperformed regional banks by a mile in 2007-2009 and we expect something similar here.
While we are sure they will outperform the banking index, investing is not a beauty contest. We don't believe being prudent on reducing financial sector exposure with the most inverted yield curve is a bad bet.
Arbitrage Opportunity In Secondary Securities
While we are out of the common shares, we did want to quickly point out a chance to swap the secondary securities.
New York Community Bancorp, Inc. DEP SHS REPSTG A ( NYCB.PA ) pays a 6.375% coupon on par and currently yields 6.81%.
New York Community Capital Trust V UNIT 05/07/51 ( NYCB.PU ) pays 6.0% on par value (note this is $50 in this case) and yields 7.4% currently.
This security also has a maturity date and this creates a yield to maturity of over 8.25%. NYCB.PU is rated higher compared to NYCB.PA by the only rating agency which is giving an opinion.
NYCB
But at worst you would see them as equals and even then the switch makes sense. One point to consider before pulling the trigger would be the taxation implications. NYCB.PU does not get the favorable 15% tax rate whereas NYCB.PA does. So the switch definitely makes sense in a tax deferred account, but within a regular account, one would have to crunch a few more numbers.
Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.
For further details see:
New York Community: I'll Leave Manhattan