New York Community Bank (NYCB) is facing yet another blow as Moody’s Investors Service downgrades its deposit rating for the second time in a month. This downgrade could have significant implications for the bank’s ability to retain deposits, as certain business clients require an investment grade deposit rating from NYCB. The bank has already experienced a stock freefall, with shares falling 73% this year. Analysts and investors are particularly concerned about the status of NYCB’s deposits, especially since the ratings cuts by Moody’s. The downgrade could impact funds in the bank’s “Banking as a Service” business and its mortgage escrow unit, which hold billions of dollars in deposits.
The risk of deposit flight has become a major concern for NYCB, as the bank’s ratings continue to decline. There is speculation that the bank may face difficulties in servicing deposits if its ratings fall further. Citigroup analyst Keith Horowitz has warned that there is potential risk to servicing deposits in the event of a downgrade. NYCB executives had previously stated that the deposit rating would have to fall four notches before being at risk, but it has already fallen six notches since then.
It is unclear what contractual obligations NYCB has in the event of breaching investment grade status, or whether downgrades from multiple ratings firms would be needed to trigger these provisions. Fitch Ratings recently downgraded NYCB’s credit ratings to junk, but kept the bank’s long-term uninsured deposits at a higher rating. This raises questions about the potential impact of different ratings agencies on NYCB’s contractual obligations.
To replace deposits, NYCB may need to resort to raising brokered deposits, issuing new debt, or borrowing from the Federal Reserve’s facilities. However, these options would likely come at a higher cost for the bank. Analysts believe that NYCB will do whatever it takes to keep deposits in-house, but as the scenario unfolds, it may become more cost-prohibitive to fund the bank’s balance sheet.
Overall, NYCB’s recent downgrades and the potential flight of deposits pose significant challenges for the bank. It remains to be seen how NYCB will navigate this situation and whether it will be able to retain its deposits amidst the ongoing financial turmoil.
