New York Community Bancorp: Worth Revisiting

by The Compound Investor

Earlier in the year I wrote a piece setting out the investment case for New York Community Bancorp (NYSE: NYCB). The short version: this a reliably conservative bank throwing off a decent dividend. At the time its shares traded for around $12.70 each. Factor in annual earnings per share of $0.80; a dividend of $0.68 per share; plus book value of around $13 per share, and it looked a fairly good deal.

Fast forward seven months and the stock’s performance has been pretty poor. Indeed it looks like like that deal has got a whole lot better given New York Community Bancorp is down 20% since that first article. Earnings and the dividend are both still intact, and the share price is now well below current book value.

Truth be told this stock has been a dog for some time now. I mean bank stocks should have been decent investments since the 2009 nadir. Whilst the Dow Jones U.S. Banks Index has returned around 16% per annum over that time, New York Community Bancorp’s share price is actually pretty much the same as it was during the 2009 market bottom. Admittedly the company has churned out a bunch of dividend cash over that period – approaching $9 per share to be a bit more precise – but it still only adds up to 7.5% annual returns since the 2009 bottom. (In fairness to the bank it has delivered compound annual returns of over 20% since it listed back in 1993).

That said I always think it is a mistake to cast aside a decent business solely on the basis of poor recent historical returns. As far as banks go New York Community Bancorp is one of the most conservative on the market. As I mentioned in the first piece its primary business is in financing low risk multi-family rent regulated apartment buildings. Non-performing loans currently stand at just 0.14% of total loans outstanding and the net charge-off ratio is virtually zero. In other words the asset quality here is top notch.

So what’s been holding the stock back? Well, for a few years the company was reluctant to grow beyond the $50 billion asset mark in order to avoid being designated as a systemically important financial institution (SIFI for short). That is now no longer an issue after¬†Congress lifted the burden on banks in the $50 to $250 billion asset range back in May.

The upshot? New York Community Bancorp is theoretically free to grow organically once again. Indeed total assets already stood at $51.2 billion by the end of Q3 2018. That was some 5.5% higher than the $48.5 billion posted at the same point in 2017 and the company expect mid-single digit loan growth going forward.

The good news is that there are a few more avenues from which it can grow earnings. Firstly, rising interest rates will eventually feed through to the company’s asset base. In fact around $20 billion worth of loans will be refinanced over the next three years. The average interest rate on the bank’s portfolio of multi-family loans stands at around 3.5% right now. New issues are currently pricing at about 4.5%. That extra percentage point is significant given the bank has around $30 billion worth of multi-family loans on its balance sheet. (For reference net income should clock in at around $390 million this year if analysts’ forecasts prove accurate).

Secondly, there are some operational costs that can probably be trimmed here. In the buildup to SIFI status the bank took on a bunch of extra expenses associated with the enhanced regulation. Those should now start to roll back, and management tentatively expect the bank’s efficiency ratio (i.e. non-interest expenses to net income) to fall from its current value of just under 50%. Finally, management are usually quick to point out the bank’s history of bolt-on acquisitions. There have been around a dozen or so since the turn of the century, and analysts expect more in the near future.

(Source: New York Community Bancorp Q3 2018 Investor Presentation)

All-in-all it really isn’t very hard to construct a scenario whereby shareholders see double-digit returns from this stock. I mean the starting dividend yield is already 6.65%. The balance sheet is free to grow so we can add mid-single digit loan growth as per management forecasts. Acquisitions? Margin improvement? There’s actually quite a lot that can move the needle here. It seems strange that the stock is trading at its 2009 lows – some 20% below book value per share – but it’s a great opportunity for value-minded folks to revisit what is still a solid business.