Please ensure Javascript is enabled for purposes of website accessibility

Why New York Community Bancorp Is a Perfect Takeover Target

By John Maxfield - May 6, 2015 at 8:08AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It's time for the hunter to become the hunted.

The executives at New York Community Bancorp (NYCB 4.35%) haven't been shy during the last few years about their interest in pursuing a "transformative" acquisition. But the bank's concentrated focus on a specific niche market -- namely, financing the ownership of rent-controlled, multifamily apartment buildings in the New York City metropolitan area -- seems to make it a more suitable acquiree than acquirer.

Since going public two decades ago, New York Community Bancorp has generated one of the highest returns in the bank industry. If you factor in both its share price appreciation and its generous dividend payout, it has produced a total shareholder return of 3,630% -- or nearly twice that of U.S. Bancorp, arguably the best-run big bank in the country.

NYCB Total Return Price Chart

New York Community Bancorp has achieved this by pursuing a strategy of growth by acquisition. During the last decade-and-a-half, the company has purchased roughly a dozen banks. Most of these added to its stronghold in and around New York City, but more recently it has expanded by purchasing once-ailing lenders in Ohio and Arizona.

To date, it's hard to argue with New York Community Bancorp's strategy. It was one of the few multibillion-dollar banks in the country to sustain its dividend payout throughout the financial crisis. That's because New York Community Bancorp, unlike most of its peers, experienced minimal loan losses, even at the nadir of the downturn, thanks to the resilience of the underlying collateral (apartment buildings insulated by rent-control legislation) and the prudence of its underwriting.

It's for these very reasons, however, that current and prospective investors should be suspicious of New York Community Bancorp's further expansion into non-core markets. Indeed, the reason its business model works so well is that its focus on large loans allows it to achieve unusually potent economies of scale. Last year, its expenses accounted for a mere 43% of its net revenue, compared to an average of 63.5% for the industry at large. Additionally, by specializing in New York City's highly coveted rent-controlled properties, there's a comparatively small risk that its borrowers won't have sufficient cash flow to pay their obligations.

By venturing into Ohio and Arizona, New York Community Bancorp is effectively diluting these competitive advantages. Its banks in these far-flung states are standard lenders, collecting deposits from consumers and then lending the funds to businesses and prospective homebuyers. It isn't a bad model, but it's nowhere near as safe or as lucrative as New York Community Bancorp's bread-and-butter multifamily lending. Another transaction in this direction -- particularly a "transformative" one -- would fix something that isn't broken.

This isn't to say that New York Community Bancorp shouldn't be pursuing some type of deal. Looking at its financial statements, any experienced bank analyst would tell you that its biggest opportunity is in securing consumer deposits, which cost next to nothing in terms of interest expense. New York Community Bancorp, on the other hand, relies on higher-yielding brokered deposits. As a result, its cost of funds in the first quarter of this year equated to 1.37%, compared to only 0.55% for U.S. Bancorp and 0.26% for Wells Fargo.

In light of this, there's little doubt that New York Community Bancorp could unlock value through a deal that, in one fell swoop, gives it access to $20 billion or so of cheap financing. But the problem is that such a deal would, almost by definition, entail a sprawling (and highly cost-inefficient) branch network. Given this, it isn't unreasonable to think that a more ideal solution would be for a large bank that already has a copious amount of cheap funding and a distinguished history of running an efficient branch network -- say, Wells Fargo or U.S. Bancorp -- to purchase New York Community Bancorp. In this case, it may be in the hunter's interest to become the hunted.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

New York Community Bancorp, Inc. Stock Quote
New York Community Bancorp, Inc.
NYCB
$9.12 (4.35%) $0.38

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
321%
 
S&P 500 Returns
111%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.