New York Community Bancorp Inc.'s ongoing credit quality struggles will present challenges in the short term for its efforts to grow commercial and industrial lending, analysts said.
Credit expense from New York Community's distressed commercial real estate (CRE) portfolio has weighed on its earnings since the fourth quarter of 2023. New York Community is aiming to shrink its CRE book while growing its commercial and industrial (C&I) loan portfolio to diversify its balance sheet over the next few years, but gaining C&I growth momentum will be a challenge in the short term as the company works through its CRE credit quality issues, analysts said in interviews with S&P Global Market Intelligence.
During New York Community's second quarter earnings call, executives said they view C&I as one of its key "growth engines" in their efforts to expand the organization. Raymond James analyst Steve Moss, however, said he was "surprised" to hear executives talking about growth, given the current state of the company's credit quality.
"When a bank is in a troubled condition, you don't grow," Moss said in an interview. "It doesn't seem like they're in a place to grow the bank."
New York Community's nonperforming assets increased to 2.26% of its assets during the second quarter compared to 1.44% in the first quarter, while net charge-offs rose to 1.68% of average loans from 0.39%, according to S&P Global Market Intelligence data. The second quarter was also the third in a row that the company reported a net loss after its credit loss provision expense increased 23.8% to $390 million.
Adding to the challenge is that New York Community has historically focused on CRE lending with C&I loans making up a much smaller share of its portfolio, Citigroup analyst Ben Gerlinger said in an interview. CRE and multifamily loans accounted for 55.6% of its portfolio at the end of the second quarter, compared to 12.8% for C&I loans, according to S&P Global Market Intelligence data. Gaining C&I growth momentum with a smaller base will be difficult, and as New York Community continues to shrink its CRE book, that will also hold back the company's growth, Gerlinger said.
Subject to enhanced capital and risk management requirements since becoming a $100 billion bank, New York Community has taken steps to bolster its capital and work through its credit quality issues such as selling its mortgage warehouse and mortgage servicing businesses and adding 13 new hires to its leadership team, with nine in July and four in April. Both the new hires and the mortgage business sales are dilutive to New York Community's earnings, but earnings are less important for New York Community right now than focusing on capital and getting a handle on its credit quality, D.A. Davidson analyst Peter Winter said in an interview.
"The sales of the two mortgage businesses were very important to strengthen the capital ratios, and they're now at the upper end of peers," Winter said. The company's pro forma common equity Tier 1 ratio for the second quarter following the mortgage business sales is 11.2%, compared to 10.6% for other banks in its asset class, according to a company filing. The fact that New York Community sold its mortgage businesses to build capital demonstrates that the company's turnaround is a long-term endeavor and more losses are likely to come, Moss said.
As for the hires, several including Chief Credit Officer Kris Gagnon; Scott Shepherd, the new head of CRE lending; and James Simons, who will advise on credit administration, previously worked at OneWest Bank, another bank turnaround that was sold in 2015. Chairman, President and CEO Joseph Otting, who joined the company on April 1, is also a OneWest veteran.
"It's kind of getting the band back together," Gerlinger said. "They know who those people are and they operate well together."
Otting also previously worked with Richard Raffetto — who is leading the private banking and C&I initiatives — when they were both at U.S. Bancorp. During the conference call, Otting said the company has around $20 billion of C&I assets, and the goal is to grow that to $30 billion to $35 billion in the next three to five years. Otting noted that the team has executed on this type of growth at other institutions.
"We're very optimistic as a new entrant into the general specialized lending, middle-market lending, the type of people we're hiring will give us immediate access to opportunities in those spaces," Otting said.
The new hires will ultimately help the company to reduce its CRE exposure and build up its C&I book, Winter said. That should lead to stronger earnings growth, but making that transition will take time, he added. Similarly, Deutsche Bank analyst Bernard Von Gizycki said that while the company now has the personnel in place to begin executing on its turnaround strategy, that turnaround is still in the "early innings."
"They continue to focus on credit and risk management," Von Gizycki said in an interview. "Once they fix those areas, then they can shift gradually to growth."