New York Community Bancorp: Margin Increase, Loan Growth To Boost Earnings (NYSE:NYCB)

Via SeekingAlpha.com

New York Community Bancorp, Inc. (NYSE:NYCB) reported earnings of $0.2 per share in the first quarter, almost unchanged from the last quarter of 2019. Earnings will likely improve in the coming quarters because of an increase in the net interest margin following the Federal funds rate cuts. NYCB’s average yield is stickier than the average funding cost; therefore, the decline in interest rates will widen the margin. Additionally, NYCB’s loan pipeline is more robust than before, which will support earnings in the remainder of the year. On the other hand, somewhat elevated provision expense in the second quarter will limit earnings growth. Overall, I’m expecting earnings per share to increase by 12% year-over-year to $0.86 in 2020. NYCB is presently less risky than other banks due to its loan portfolio characteristics. The December 2020 target price suggests a high upside from the current market price; therefore, I’m adopting a bullish rating on NYCB.

Downward Stickiness of Yields to Widen Margin in the Year Ahead

The 150bps federal funds rate cut in March will benefit NYCB’s net interest margin, NIM, this year because the company’s yields are stickier than costs. The average yield is downward sticky because the loan portfolio is geared towards multi-family mortgage loans through which NYCB has locked-in fixed rates for long terms. Moreover, as mentioned in the first quarter’s conference call, the management is confident about retaining customers amid waning competition, which will ensure that yields are not threatened by refinancing activity. At the same time, deposit repricing will lower the funding cost in the remainder of the year. As mentioned in the first quarter’s investor presentation, around $13.9 billion worth of certificates of deposits will mature in the next four quarters, representing 30% of total funds. Additionally, around $1.9 billion worth of wholesale borrowings will mature in the next four quarters, representing 4% of total funds. As mentioned in the conference call, the management expects NIM to increase by double digits in the second quarter and to continue to increase in the third and fourth quarters. Considering the factors mentioned above, I’m expecting NIM to increase by 7bps in the second quarter and by 13bps in the full year. The following table shows my estimates for yield, cost, and NIM.New York Community Bancorp Net Interest Margin

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Robust Loan Pipeline to Drive Earnings

NYCB’s loan pipeline was quite robust going into the second quarter; hence, the loan portfolio is likely to continue to grow. As mentioned in the conference call, the pipeline stood at $2.1 billion at the time of the call, 40% higher than the fourth quarter. Low interest rates and waning competition will likely keep loan growth high in the remainder of the year. NYCB is also participating in the Paycheck Protection Program, PPP. However, the company is not a big commercial and industrial lender; therefore, the program will have only a limited impact on loans. As mentioned in the conference call, PPP will increase loans by only $100 million to $200 million. The management expects mid-single-digit loan growth in 2020. Based on management’s guidance, I’m expecting loans to increase by 5% year-over-year in 2020, as shown below. New York Community Bancorp Balance Sheet Forecast

Provision Expense to be High in the Second Quarter, Normalize in the Second Half of the Year

NYCB’s provision expense increased to $21 million in the first quarter from $2 million in the fourth quarter of 2019. I’m expecting provision expense to decrease in the second quarter and return to a normal level in the third quarter. The expectations of a decline are attributable to the loan book characteristics. NYCB’s loan portfolio is concentrated in multi-family mortgage loans, which are safer than other loan categories like consumer and commercial and industrial. As mentioned in the conference call, the loan-to-value ratio of the multi-family portfolio is quite low, at 57%; therefore, it is highly unlikely that property prices will fall below the loan value. Further, the management estimates April’s rent collections in rent-regulated buildings to be 80-85% of total occupancy, which is not too bad in an economic crisis. Moreover, the problematic taxi medallion portfolio now stands at just $33.5 million, or 0.08% of total loans. Considering these factors, I’m expecting NYCB to book provision expense of $46 million in 2020, up from $7 million in 2019.

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Expecting Earnings to Increase to $0.86 per Share

The expansion in NIM and growth in the loan portfolio will likely drive earnings, while high provision expense in the first half of the year will limit earnings growth in 2020. Overall, I’m expecting earnings per share to increase by 12% year-over-year to $0.86 in 2020. The following table shows my income statement estimates.New York Community Bancorp Income Forecast

The severity and duration of the pandemic are unknown; therefore, the provision expense may give a negative surprise in the year ahead. However, I believe that NYCB is less risky than other banks and bank holding companies because of its loan portfolio mix.

Adopting a Bullish Rating Based on Capital Appreciation Potential

I’m using the historical price to book, P/B, multiple to value NYCB. The stock has traded at an average P/B multiple of 1.01 in the past, as shown in the table below.New York Community Bancorp HIstorical Price to BookMultiplying the historical average P/B ratio with the forecast book value per share of $13.5 gives a target price of $13.6 for December 2020. This target price implies an upside of 33% from NYCB’s May 28 closing price. The following table shows the sensitivity of the target price to the P/B multiple.New York Community Bancorp Valuation Sensitivity

Apart from the high upside, NYCB is also offering an attractive dividend yield of 6.7%. The dividend yield is based on the expectation that NYCB will maintain its quarterly dividend at the current level of $0.17 per share in the remainder of 2020. The earnings and dividend estimates suggest a payout ratio of 79% for 2020, which is in line with the past four-year average of 79%. Therefore, there is little chance of a change in the dividend level this year.

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Based on the potential for capital appreciation, the attractive dividend yield, and a relatively low risk level, I’m adopting a bullish rating on NYCB.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: This article is not financial advice. Investors are expected to consider their investment objectives and constraints before investing in the stock(s) mentioned in the article.