The Zacks Analyst Blog Highlights JPMorgan, New York Community and Moodys
For Immediate Release
Chicago, IL – March 26, 2024 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: JPMorgan JPM, New York Community Bancorp, Inc. NYCB and Moody’s Corporation MCO.
Here are highlights from Monday’s Analyst Blog:
Bank Mergers Above $100B to be Subjected to Increased Scrutiny
Mergers that create banks with more than $100 billion in assets will now be subject to increased scrutiny. On Thursday, the Federal Deposit Insurance Corporation’s (“FDIC”) board approved a proposal (with updated merger guidance) by a 3-2 vote.
Under the proposal, a special focus will be given to maintaining the stability of the banking sector. Other financial stability concerns, which include factors like whether a merged bank will add complexity to the financial system and the extent of its cross-border activities, will also be looked into. Moreover, per the new guidance policy, the regulator will increase its focus on anti-money laundering concerns for banks with $100 billion in assets or more.
It is expected that the FDIC will accept public comment on the proposal for 60 days after it is published in the Federal Register.
The FDIC’s chairman, Martin Gruenberg, said, “Given the rapid pace of change and consolidation in the banking industry today, it is vital that the FDIC provide guidance on how it would apply the critical statutory factors under the Bank Merger Act relating to competition, financial resources, the convenience and needs of communities, financial stability and money laundering.”
Following the U.S. regional bank failures early last year and the resulting acquisitions, mergers and industry consolidations have come under increased scrutiny.
Gruenberg stated, “The bank failures of 2023 underscore the risks that banks with assets over $100 billion can have for financial stability.”
When JPMorgan, already the largest bank by assets, was allowed to acquire the failed First Republic Bank in May 2023, various people opposed the deal.
After almost two months of efforts to save the flagging institution, First Republic was seized by the FDIC and then sold to JPM. JPM had bought the bulk of First Republic’s $228 billion of assets (adding to its huge $3.7 trillion assets balance) and assumed deposits worth $92 billion by paying $10.6 billion.
JPMorgan didn’t acquire any of First Republic’s corporate debt or preferred stock. Jamie Dimon, the chairman and CEO of JPMorgan, said, “This acquisition modestly benefits our company overall, it is accretive to shareholders, it helps further advance our wealth strategy, and it is complementary to our existing franchise.”
However, the host of risks, like legal challenges and ensuing charges, as well as the employee exodus that JPM had to face because of the acquisition, cannot be ignored.
Likewise, New York Community Bancorp, Inc., which acquired parts of failed Signature Bank in early 2023 (immediately after acquiring Flagstar Bancorp in December 2022), has been facing a string of challenges.
This January, the bank had to set aside bigger-than-expected provisions for potential bad loans, mainly due to its commercial real estate (“CRE”) exposure.
The company shocked shareholders by posting unexpected CRE loan losses in its fourth-quarter 2023 results and announcing a 71% cut in its quarterly dividend.
In February, because of concerns regarding its CRE exposure, NYCB started exploring the option of selling its portfolio of residential loans to reduce its mortgage risk amid mounting troubles.
While NYCB said that it was building capital to deal with the stricter regulatory requirements that came after the purchase of Signature Bank lifted its assets above the $100-billion threshold, CRE remains an area wherein borrowers are at increased risk due to high interest rates and low occupancies.
Because of these credit quality-related issues, NYCB’s credit grade was downgraded to junk by Moody’s Corporation. Moody’s downgraded NYCB’s long-term issuer rating two notches below investment grade to Ba2. Also, MCO said that the company’s ratings could be downgraded further if conditions deteriorate.
A few weeks later, NYCB announced a $2.4 billion charge to write down goodwill that it had carried from past bank mergers, identified “material weaknesses” in its loan review process and quickly changed CEOs.
Nevertheless, things started to improve a little for NYCB in early March.
The company completed a deal that gave it a $1.05 billion capital infusion from an investor group led by former Treasury Secretary Steven Mnuchin. Following this, NYCB announced plans of a reverse stock split. However, it took a drastic measure to shore more liquidity, slashing its quarterly dividend by 80% to a penny.
Then, in its 2023 annual filing, the company unveiled that on Feb 29, 2024, it sold the commercial co-operative loan, realizing a gain of $26 million from the prior written-down fair value estimate. In fourth-quarter 2023, NYCB recorded $112 million in net loan charge-offs related to its co-operative loan portfolio.
Additionally, on Mar 13, 2024, New York Community closed the sale of consumer loans, with a net book value of $899 million. Gains on the sale of these loans will be reported in first-quarter 2024.
Following the capital infusion that NYCB received, its credit rating was also raised by Moody’s to B2 from B3. But it is still five notches below investment grade.
While the recent positive changes are expected to benefit the bank that has been struggling for a long time now, a full reversal in its financial situation is not likely anytime soon.
Per Moody’s, “NYCB still faces a number of key decisions in its strategic development and in effectively addressing its fundamental challenges in governance, financial profile, risk management and internal controls.”
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