The Impact of Moody’s Rating Cut on New York Community Bank’s Deposits

The Impact of Moody’s Rating Cut on New York Community Bank’s Deposits

New York Community Bank recently faced a significant setback as Moody’s Investors Service cut the deposit rating of its main banking subsidiary by four notches. This downgrade, which put the rating at Ba3, three levels below investment grade, marked the second time in just a month that Moody’s had taken such a drastic action. The implications of this downgrade could have far-reaching consequences for the bank and its ability to retain deposits.

Following the announcement of the rating cut, NYCB’s stock price plummeted dramatically, with shares falling by 73% since the beginning of the year. The stock price declined by 23% in a single day, with shares trading below $3 each. This significant drop in price has raised concerns among analysts and investors regarding the bank’s financial stability and its ability to navigate the challenges ahead.

One of the key areas of focus for analysts and investors is the status of NYCB’s deposits. The bank reported having $83 billion in deposits as of February 5, with 72% of those deposits insured or collateralized. However, the figures provided were before Moody’s began downgrading the bank’s ratings, leading to speculation about a possible flight of deposits since then. This is particularly concerning for the bank’s “Banking as a Service” business with $7.8 billion in deposits and its mortgage escrow unit holding between $6 billion and $8 billion in deposits.

Risk to Deposit Servicing

Analysts have highlighted the potential risks to servicing deposits in the event of a downgrade. Citigroup analyst Keith Horowitz noted that there is a risk of deposit servicing in the event of a downgrade, particularly for the bank’s mortgage escrow business. NYCB executives confirmed that the mortgage escrow business needed to maintain an investment-grade status, raising concerns about the implications of the recent ratings cuts.

Strategies to Retain Deposits

In response to the potential flight of deposits, NYCB may need to consider alternative strategies to retain deposits. This could include raising brokered deposits, issuing new debt, or borrowing from Federal Reserve facilities. However, these measures are likely to come at a higher cost, which could put further strain on the bank’s financial position. Analysts suggest that while the bank will make every effort to retain deposits, the increasing cost of funding the balance sheet may pose a significant challenge.

The recent downgrade by Moody’s of New York Community Bank’s deposit rating has raised significant concerns about the bank’s ability to retain deposits and maintain financial stability. The implications of this downgrade could have a lasting impact on the bank’s operations and financial health, requiring proactive measures to address the challenges ahead. As the bank navigates this uncertain period, careful monitoring of deposit levels and deposit servicing obligations will be crucial to mitigating risks and ensuring a sustainable path forward.


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