Why NYCB's troubles may not be over

It's been another tumultuous week for New York Community Bancorp (NYCB): after reporting it raised $1 billion in capital from private investors — including former Secretary of the Treasury Steve Mnuchin's firm Liberty Strategic Capital — the regional bank disclosed it lost $7.8 billion, or 7%, of deposits over the past month.

Arch Indices Co-Founder and CEO Yang Tang joins Yahoo Finance in-studio what NYCB's latest developments could mean for the greater US banking industry and the commercial real estate market.

"I actually think [NYCB's situation] is worse — the incremental cost of funding right now is extremely high. They were asked on the call today 'what is the marginal cost of deposits?', [they] avoided the question," Tang says. "The Fed funds rate is 5.5%. So if you go to the Federal Home Loan Banks and you get a loan, you're going to be looking at 6%. The average yield on the loan right now is 5.72%. So every dollar they have to replace is negative it on the net interest margin."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

SEANA SMITH: Troubles at New York Community Bancorp are escalating. The bank announcing it's lost 7% of its deposits this month. The regional lender also slashing its dividend this morning to $0.01, that's from $0.05. And before that, down from $0.17.

Now this all comes after NYCB announced a new CEO and $1 billion rescue plan on Wednesday. Shares moving higher this morning, up just about 1%. That slight edge up coming after a massive day of mid-day declines at least yesterday on a report that NYCB was looking for investors. Official announcement of that $1 billion infusion pushing shares back into the green.

Here with more, we want to bring in Yang Tang, he's the Co-Founder and CEO of Arch Indices. Yang, it's great to have you here on set. So just talk to us about this $1 billion infusion. It's looking to reassure, regain maybe the confidence of investors out there that NYCB is going to be OK. Is it enough?

YANG TANG: I don't think so. And I think, let's look at NYCB holistically. It's $115, $117 billion in assets. It's actually got a loan-to-deposit ratio of over 100%. So if you actually factor in the 7% deposit outflow, you're probably closer to $110, $115, which is a very problematic place for a bank.

Secondly, NYCB has $13 billion in commercial real estate and $37 billion multifamily housing. And this is where the problems arose. If you think about what has happened to property prices, interest rates started going up. The cap rates have yet to readjust to the new environment of property prices.

So at this point $1 billion in a $50 billion asset is about 2%. So, realistically, what is the confidence that the new management team, which seems like they've done due diligence for all of 2 and 1/2 weeks, have and where the loan book is going to end up?

BRAD SMITH: What's the significance of the group of investors that have come forward versus another large bank making an outright acquisition of NYCB?

YANG TANG: I think a lot of this was very much a headline investor. They have the former Treasury Secretary. They have the former OCC comptroller chairman there. They've worked together on IndyMac. They've been successful in the past. I don't think it's in the interest of the Fed right now to push a huge consolidation wave, because that's going to lead to criticism and fear that the US bank industry is going to be over consolidated.

So if you actually look at the deal they got, they got a very good deal given who they are.

SEANA SMITH: And the 7% of the loss-- NYCB lost 7% of its deposits in just one month. Is that maybe not as bad as the Street had feared, given the massive trouble that the bank is in?

YANG TANG: I actually think it's worse. The incremental cost of funding right now is extremely high. They were asked on the call today, what is the marginal cost of deposits? Avoided the question. Fed funds rate is 5 and 1/2 percent.

So if you go to the Federal Home Loan Bank and you get a loan, you're going to be looking at 6%. The average yield on a loan right now is 5.72%. So every dollar they have to replace is negative on the net interest margin.

BRAD SMITH: What is this foretelling about the rest of the commercial real estate sector right now?

YANG TANG: I think it's very foretelling that there's going to be a lot more losses to come. The commercial real estate lending sector is the bread and butter business of regional banks. You know everybody thought they were a conservative lender in 2020, right? Interest rates are 0%. You lend against a 4 and 1/2 cap rate on a class A office space. Great.

Today, 4 and 1/2 cap rate on a class A office space gets nobody interested. And if you look at where even multifamily prices have done, the prices have greatly appreciated income. So interest rates are up. The income from the property hasn't caught up with the property prices.

And you sit there and you go, oh, I have a 60 LTV, I have a 50 LTV loan, I'm a conservative lender. Well, great, everybody's a conservative lender in a good environment, right? Who's a conservative lender in a bad environment?

SEANA SMITH: So what does that fall out look like then?

YANG TANG: I think a lot more capital raises are going to have to come. They're going to have to push consolidation. There's close to 5,000 banks in the United States. It's dominated by 4 large ones. The other 4,800 and whatever really live on scraps. So to make the business model work, especially in today's digital age, you have to have some kind of economies of scale to compete.

BRAD SMITH: The company said on that call as well in the presentation that 80% of the total deposits are insured. What's the deal with the other 20%? Were they clear about that at all?

YANG TANG: A lot of it is brokered CDs, wholesale funding. They have some money market accounts. They also participate in reciprocal deposits. So I give you a deposit, you give me a deposit, right? The client is insured at two different banks, but in a way I didn't lose the deposit.

So they have a lot of those types of programs going. They're all very expensive. And that's the point is the marginal cost of funding right now for a bank is extremely high.

SEANA SMITH: You closely follow the sector clearly. You have a very close eye on a number of other regional banks. Are there one, two, or three that stand out to you that maybe could be next in terms of that risk and could be in a similar situation to NYCB?

YANG TANG: You know it's really hard to predict these things, because a bank fails when there's a run on the bank. And if you look at Silicon Valley Bank, First Republic Bank-- nobody knew that the run was going to happen until it happened.

And all banks are kind of similar. They also have very high commercial real estate, multifamily CRE exposure. And they have high loan-to-deposit ratio. So if you want to go through and do a quick screen, who's got low capital ratio, high loan-to-deposit, and high CRE exposure?

SEANA SMITH: Yang Tang, great to have you. Thanks so much for being on set with US, CEO of Arch Indices. Thanks.

YANG TANG: Thank you so much.