A piece setting out the investment case for New York Community Bancorp (NYCB) featured earlier in the year. The short version: this is a reliably conservative bank throwing off a decent dividend. At the time, its shares traded for around $12.70 each on the back of $0.80 per share in net profit. Factor in a 68¢ annual dividend, plus book value of $13 per share, and it seemed like a good deal. The market obviously disagreed, with the stock down circa 20% since then. Not good.
Truth be told, NYCB has been a dog for some time now. I mean, bank stocks should have been decent investments since the 2009 nadir, but not this one. While the Dow Jones U.S. Banks Index has returned around 16% per annum over that time, NYCB’s share price is actually pretty much the same as it was during the 2009 market bottom. Admittedly it has also churned out a ton of dividend cash in that time – circa $9 per share to be more precise – but still, that only adds up to 7.5% annual returns since the 2009 bottom. (In fairness to the bank it returned circa 20% per annum since listing back in 1993).
That said, it always feels like a mistake to cast aside a decent business solely on the basis of poor recent returns. And New York Community Bancorp is also one of the most conservative banks on the market. 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 and the net charge-off ratio is virtually zero. Or put another way, the asset quality here is top notch.
So, what exactly held the stock back? Well, the bank was reluctant to grow beyond the $50b asset mark in order to avoid being designated as a systemically important financial institution (“SIFI”). That is no longer an issue after Congress lifted the burden on banks in the $50-$250b asset range back in May. The upshot? New York Community Bancorp appears free to grow organically once again. Indeed, total assets already stood at $51.2b by the end of Q3 2018, or 5.5% higher than the $48.5b posted at the same point in 2017. The bank expects 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. The average interest rate on the bank’s portfolio of multi-family loans stands at around 3.5% right now, while new issues are currently pricing at about 4.5%. That extra point looks significant given the bank has around $30b worth of multi-family loans on its balance sheet. For reference, net income should clock in at around $390m this year according to analysts. Also, around $20b worth of loans look set for refinancing over the next three years.
Secondly, there are some operational costs that can probably be trimmed here. Bear in mind that the bank took on a bunch of extra expenses associated with SIFI status. Those should now start to roll back, and management tentatively expect the bank’s efficiency ratio (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 going forward.
All-in-all it really isn’t very hard to construct a scenario whereby shareholders see double-digit returns from the 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 is actually quite a lot that can move the needle here. It seems strange that the stock trades around its 2009 lows – some 20% below book value per share too – but it is a great opportunity for value-minded folks to revisit what is still a solid business.
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