Fitch Completes U.S. Niche Real Estate Bank Peer Review
OREANDA-NEWS. Fitch Ratings has completed a peer review of the U.S. Niche Real Estate Banks, which include Astoria Financial Corporation (AF), Dime Community Bancshares, Inc. (DCOM), Emigrant Bancorp, Inc. (EMIG), and New York Community Bancorp, Inc. (NYCB). Ratings for DCOM, EMIG and NYCB were affirmed at their respective levels with a Stable Outlook. Fitch maintains the Rating Watch Positive on AF's ratings. Concurrently with its affirmation of EMIG, Fitch has withdrawn coverage of EMIG for commercial reasons.
On Nov. 3, 2015, Fitch affirmed NYCB's rating with a Stable Outlook and placed AF on Rating Watch Positive following the announcement of the planned merger between the two banks that is expected to close in the fourth quarter of 2016.
NYCB's ratings lead the group with Long-Term and Short-Term Issuer Default Ratings (IDRs) at 'BBB+/F2', reflecting NYCB's relatively strong company profile, consistent earnings and stable asset quality throughout the economic cycle. These strengths are balanced against NYCB's relatively higher risk funding profile and concentrated loan portfolio. In the fourth quarter of 2015, NYCB reported a loss after executing its plan to restructure a large portion of its wholesale funding, which resulted in a significant charge. This loss was supported by a successful follow-on common stock offering that raised $630 million in proceeds in the same quarter.
The Long-Term and Short-Term IDRs for DCOM were affirmed at 'BBB'/'F2', while AF's 'BBB-'/'F3' IDRs remain on Rating Watch Positive. Ratings for these entities continue to be supported by stable asset quality performance and constrained by weak liquidity and funding profiles. DCOM's above peer average asset quality and earnings performance are key rating differentials between DCOM and AF. After-tax profit from DCOM's recent sale of certain real estate assets in Williamsburg, Brooklyn should boost capital to support the bank's growth via new loan originations, and Fitch expects sustained balance sheet growth over the next three years. However, DCOM's exposure to rent regulated properties, which generally have stable cash flow characteristics, mitigates risks surrounding balance sheet growth.
EMIG's ratings, including the Long-Term and Short-Term IDRs of 'BB/B', diverge from the rest of the group due to its differing business model focused on higher risk or niche business lines such as cash flow loans to lower middle-market private equity sponsored companies, fine art lending, sports lending, and syndicated loans, as well as legacy asset quality issues within the bank's 1 - 4 family residential loan portfolio. The rating affirmation reflects EMIG's strong capital levels and reduced balance sheet risk. Ratings continue be constrained by EMIG's limited franchise and business position, reliance on net interest income, and historically elevated net charge-offs through the cycle.
While the business models of the U.S. Niche Real Estate Banks vary, these banks are generally characterized by their limited deposit franchises and geographic concentrations when compared to larger U.S. banks. With the exception of EMIG, these banks have higher levels of multifamily lending than traditional depositories. Rating constraints include these banks' narrow business models, loan concentrations, and limited deposit franchises. The group is comprised of banks with total assets ranging from approximately $5 billion to approximately $50 billion. Due to their lack of deposit franchises, these banks rely on higher cost, wholesale borrowings as their primary source of funding and typically have higher loan to deposit ratios than more diversified depositories.
The U.S. Niche Real Estate Banks have benefited from the strength of the New York real estate market. Given the group's concentrated loan portfolios and focus on multifamily lending in New York City's highly regulated real estate market, asset quality has remained strong with very low levels of charge-offs, despite elevated balances of nonperforming assets. Fitch has observed that the New York City multifamily market remained resilient to the most recent economic downturn given rent control regulations and a limited housing supply. Fitch expects asset quality to remain steady to improve marginally as the foreclosure process in New York and New Jersey has proven to be lengthier than processes in other jurisdictions.
U.S. Niche Real Estate Banks are more reliant on spread income than more diversified depositories. Although U.S. Niche Real Estate Banks typically have short duration assets, their heavy reliance on more interest rate sensitive borrowings creates additional pressure on earnings in a rising interest rate environment.
While U.S. Niche Real Estate Banks' earnings have remained relatively flat over the past year, the quality of earnings has improved marginally, since the banks are relying less on reserve releases and securities gains to offset net interest margin (NIM) compression. In addition, the U.S. Niche Real Estate Banks typically experience greater NIM volatility than traditional commercial bank franchises due to their smaller deposit franchises. However, fewer brick and mortar branches require less overhead cost, balancing margin pressure from the recently prolonged low interest rate environment. Fitch expects earnings performance to remain challenged in the near term with prepayment activity slowing as interest rates normalize.
Fitch has published Rating Action Commentaries for the U.S. Niche Real Estate Banks, which are available on www.fitchratings.com. or by clicking on the links below. These include each issuer's key rating drivers and rating sensitivities and lists of all rating actions taken.