A good acid test for finding solid bank stocks is to see how they performed in the financial crisis. For instance, anyone tempted by the recent stellar dividend growth on offer at Bank of America might think twice when they recall the carnage inflicted on shareholders in 2008. Conversely, investors who may have noticed New York Community Bancorp’s (NYCB) recent rough patch may be willing to look again when they see how well the underlying business held up in the same period.
Cast your minds back to 2009, when problem loans were skyrocketing across the wider banking sector. NYCB posted a non-performing loans to total loans ratio of just over 2% that year. That was under half the 4.89% posted by the SNL Bank & Thrift Index. More importantly, the net charge off ratio – that is charge offs of defaulted loans, minus recoveries, as a percentage of total loans – came in at only 0.13%. The comparable figure for the SNL Bank & Thrift Index was 2.84%.
What else can we say here? Well, the bank’s efficiency ratio, which is the measure of operating expenses to revenue, is well under 50%. When you put all of this together, it results in an efficiently run bank with high quality assets, and one that also does an exceptional job of recovering problem loans. So far, so good by the sound of things.
To understand why that is the case, just consider the bank’s underlying business for a moment. Put simply, New York Community Bancorp sports a heavy weighting towards multi-family lending. As the name suggests, ‘multi-family’ basically means apartment complexes as opposed to single family housing units. Around 75% of the bank’s total loan book is from multi-family loans, accounting for just over half of its $49b in total assets. Specifically in the bank’s case, these multi-family complexes are typically ones subject to New York City rent control regulation.
With that in mind, the bank’s unusually solid performance during the financial crisis makes a bit more sense. Not only are these assets fairly stodgy to begin with, but in recessions they remain stable since fewer folks will trade out of a rent stabilized apartment to a more expensive one. The upshot is that the cashflow required to service the loan remains quite reliable during downturns.
The other thing to like about the stock is its dividend. The shares currently throw off an annual distribution of 68¢ apiece. I have that equivalent to a yield of 5.4% based on last week’s closing share price of $12.68. We have an efficiently run bank, high quality assets and an attractive looking valuation. What’s not to like?
Well, there are a few additional points worth bearing in mind. First of all, we have the growth issue. NYCB has kept its total assets steady at a shade under $50b for some years now. It was paying out virtually all of net earnings by way of dividends to shareholders in order to do so. Since banks typically grow by making (or acquiring) new loans, and loans are assets as far as banks are concerned, then holding the balance sheet steady has meant that net income and dividends haven’t really moved all that much. Indeed, NYCB sported a signature $1.00 per share annual distribution for years.
What is so special about that $50b asset figure? Well, it represents the limit at which a bank is designated as a ‘systemically important financial institution’ (SIFI). That is a tag that brings in a host of additional regulatory requirements and costs. In order to provide a longer term solution to this issue, management decided to acquire Astoria Financial back in 2015. The annual dividend fell from $1.00 per share to 68¢ per share in preparation for that acquisition, which then fell through in 2016. Without a higher dividend propping things up, the stock tanked – and it remains down over 25% on its early-2014 level.
Going forward, I think there are a couple of reasons to be more optimistic. Firstly, there’s the very real prospect of new legislation that would see the current $50b limit raised to $250b. If that turns out to be the case, then NYCB can pursue organic growth without tripping the SIFI limit. It wouldn’t take all that much earnings growth to generate attractive shareholder returns given the current 5.4% dividend yield. There’s also the prospect of M&A activity, with NYCB being either the acquirer or the acquisition. Added together, it’s enough to warrant a closer look at one of the higher quality banks on the market.
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