There's a theory on Wall Street called the cockroach theory, which suggests that a single problem at a company is often an indication that there are more problems to come. New York Community Bancorp (NYCB 1.26%) is yet another sad example of this turning out to be accurate. Although a lot of bad news is now out, the big question for investors is: How long will it take the bank to dig itself out of the hole it has created?
New York Community Bancorp goes from good to bad
In 2023, there was a series of bank runs that caused the failure of some high-profile regional banks. New York Community Bancorp actually managed to muddle through that period quite well. In fact, it bought some of the assets of Signature Bank, one of the banks that failed. Based on this, you might think that New York Community Bancorp was doing quite well for itself.
But then the company reported fourth-quarter 2023 results, and it was pretty clear that things were not so rosy. It cut its dividend from $0.17 per share per quarter to $0.05, a 70% decrease. Management materially increased its provision for credit losses as it faced difficulties with a couple of large loans. In the weeks after the earnings release, the company revamped its management team, effectively bringing in a new chief executive officer in a somewhat unusual two-step process.
However, that wasn't the end of the bad news. Just a few weeks after the CEO transition, New York Community Bancorp announced that it had lost 7% of its customer deposits due to its business troubles. While that's not exactly a full-fledged bank run, it is not a good sign. The dividend was cut again, this time to a token penny a share per quarter (just enough so institutional investors with dividend mandates could continue to own the shares). And the CEO was changed, again.
The good news from this second round of bad news was that the bank was able to secure a $1 billion cash infusion. However, admitting that a bank is so desperate for cash that it has to run to large investors for an equity investment is really not something that investors or bank customers want to hear. That remains true even if this move ends up saving the bank from going under.
It's likely to be a long turnaround
The problems facing New York Community Bancorp are probably solvable. But it won't be an easy or quick fix. Add in the management turmoil, and investors are probably looking at a years-long effort to get New York Community Bancorp back on stable ground, let alone growing again.
As if that weren't enough, because of the purchase of the Signature Bank assets and an earlier acquisition, New York Community Bancorp is large enough to fall under stricter regulatory guidelines. So this turnaround story is going to be heavily scrutinized by more than just investors. Only the most aggressive investors will want to get involved here. Note that there are a lot of other banks you can buy that are in much better shape.
As for other investors, well, dividend investors have absolutely no reason to look at New York Community Bancorp now that the dividend has fallen almost to zero. Growth investors will probably want to stay away, as well, since mending the bank may require shrinking the business in the near term. Value investors should also tread carefully. Although the stock has fallen materially, the trouble with a few big loans suggests that the value of the bank's loan portfolio may not be as strong as it seems if you look only at its financial statements.
This is an ugly story that took a turn for the worse. Perhaps the news will get better from here, but it will take a strong stomach to buy this stock. There may still be some cockroaches running around.
There's no need to take the risk
There are a lot of publicly traded banks. Many offer very attractive dividend yields backed by financially strong companies. There's no need to chase troubled New York Community Bancorp. The only investors who might be interested here are turnaround types, but even then, it might make sense to go with a bank that has a better story to tell.