NYCB’s Credit Grade Is Cut to Junk by Moody’s

(Bloomberg) — New York Community Bancorp’s credit grade was cut to junk by Moody’s Investors Service less than a week after the regional lender alarmed shareholders by slashing payouts and stockpiling reserves to cover troubled loans tied to commercial real estate.

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The bank is facing “multifaceted” financial risks and governance challenges, Moody’s wrote in a report Tuesday, lowering the company’s long-term issuer rating two notches below investment grade to Ba2. The ratings firm said it could go further if conditions deteriorate.

The stock tumbled about 60% to the lowest level since 1997, after the bank announced plans last week to slash dividends and beef up reserves to prepare for stiffer capital rules, following acquisitions that catapulted its assets beyond $100 billion. The measures followed mounting behind-the-scenes pressure from the Office of the Comptroller of the Currency, Bloomberg reported late Monday, noting that two executives overseeing risk and auditing had left in recent months.

Leadership of risk and auditing functions are a bank’s “second and third lines of defense,” Moody’s wrote. “In Moody’s view, control functions with strong knowledge of a bank’s risks are key to a bank’s credit strength.”

Long-simmering concerns that a slump in commercial property values could hurt US regional banks has intensified in recent days as lenders from Frankfurt to Tokyo signal strains in their own portfolios. Behind it all is a pandemic-induced shift to remote work, stricter rules for raising apartment rents in some markets and a run-up in interest rates that make it more expensive for strained borrowers to refinance.

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Moody’s plans to focus on the outlook for NYCB’s commercial real estate portfolio, earnings, capitalization and use of wholesale funding as it weighs whether to cut grades again. And it will further assess governance, including risk and balance-sheet management.

The bank could…