Moody’s downgrades bank’s credit rating to junk; shares tumble

New York Community Bank’s shares whipsawed between losses and gains early Wednesday after Moody’s Investors Service downgraded the bank’s credit ratings two notches to junk.

NYCB shares fell 2.8%, reversing earlier gains after the bank promoted its chairman to help stabilize the company’s operations, in premarket trading. That followed a punishing series of trading sessions that cut almost 60% of the company’s market value.

The bank made Alessandro DiNello executive chairman effective immediately, promoting him from nonexecutive chairman, to work with CEO Thomas Cangemi “to improve all aspects of the Bank’s operations,” according to a statement released at 7:45 am.

The regional bank has been in freefall since reporting a surprise fourth-quarter loss last week, along with mounting losses on commercial real estate and the need to slash its dividend by 71% to shore up capital levels. The moves reignited concerns that some small and medium sized banks could be squeezed by declines in profitability and losses on real estate holdings.

NYCB’s announcement addresses concerns over management that emerged after last week’s earnings report. The Hicksville, New York-based lender vaulted over $100 billion in assets after a pair of acquisitions — Flagstar Bank in late 2022 and the assets of Signature Bank in March 2023 — but then appeared to be caught off guard by heightened regulatory scrutiny after crossing that threshold.

DiNello, who was CEO of Flagstar Bank since 2013, joined NYCB after the acquisition closed.

Late Tuesday evening, Moody’s issued a report stating that NYCB faced “multi-faceted financial, risk-management and governance challenges.”

It downgraded all the bank’s long term ratings to Ba2 from Baa3, which is junk status, partly on concerns about turnover of the firm’s risk management leaders, and warned the assessments remain on review for further downgrade.

“The downgrade reflects Moody’s views that NYCB faces high governance risks from its transition with regards to the leadership of its second and third lines of defense, the risk and audit functions of the bank, at a pivotal time,” Moody’s wrote. “In Moody’s view, control functions with strong knowledge of a bank’s risks are key to a bank’s credit strength.”

The bank is searching for a chief risk officer and chief audit executive and has managers serving on an interim basis in those positions, NYCB said in an overnight statement made hours after the Moody’s report. Former executives in those roles left the bank in the months before its disastrous earnings report last week, Bloomberg reported.

NYCB also said the downgrade isn’t expected to have a “material impact on our contractual arrangements.”

The bank sought to boost confidence by issuing unaudited financial information as of Monday, stating that 72% of total deposits were either insured or collateralized, and that it had amply liquidity to cover uninsured deposits.

During last year’s regional banking crisis, institutions including Silicon Valley Bank and First Republic were drained of deposits after customers pulled cash from the banks.

“We took decisive actions to fortify our balance sheet and strengthen our risk management processes during the fourth quarter,” Cangemi said in the release. “Our actions are an investment in enhancing a risk management framework commensurate with the size and complexity of our bank.”

In a call Wednesday morning with investors, Dinello acknowledged the gravity of the situation NYCB suddenly finds itself in.

“We have obviously been dealing with a very serious situation since our fourth quarter earnings release,” Dinello said. “What I hope to do this morning is instill some confidence that this bank remains strong and will get itself back on the right track.”

NYCB has seen “virtually no deposit outflow” from retail branches, he said.