Summary
- New York Community Bancorp's shares have declined back to an attractive valuation.
- The company will almost certainly benefit from low benchmark interest rates although not to the same degree as during the last interest rate cycle.
- The company's persistent lack of meaningful growth in book value will continue to inhibit the potential for long term capital gains.
- Indeed, the company's preferred shares may be more appealing than the common stock.
New York Community Bancorp (NYCB) attracts frequent attention for its high dividend yield. The high dividend payout ratio, however, limits the company's potential appeal from a capital appreciation standpoint since it limits the company's ability to grow book value and, thus, incremental growth in earnings per share as we wrote last year. Instead, the company has historically relied on the issuance of new shares to support growth which dilutes the benefit to existing shareholders. The resulting lack of growth potential in earnings per share limited the appeal – and valuation – of the common shares to an annuity income investment.
The recent decline in short term benchmark interest rates and relative steepening of the yield curve should benefit the company as net interest margin expands in the next couple years. In combination with the recent decline in share price below our valuation range, the common shares are again modestly undervalued and presents a potentially appealing opportunity. We've updated our net interest margin expectations for the company as well as our associated valuation which suggests a slightly higher fair valuation range of $10.00 to $14.00. Still, we continue to believe the long term appreciation potential is limited due to the high dividend payout ratio.
Net Interest Margin
New York Community Bancorp will almost certainly benefit from a return to near zero short term benchmark interest rates. New York Community’s most recent financial disclosures reflect this likelihood with a positive net interest income exposure to declining interest rates (assuming a parallel shift in the yield curve):
Source: New York Community Bancorp 10-K (2019)
Notably, though, this actually represents a decline in the company’s short term sensitivity to declining benchmark interest rates since the middle of last year when a 100 basis point decline was projected to boost net interest income by closer to 4.25%. In essence, the company has reduced its interest rate exposure in the interim which will temper the positive impact of lower short term benchmark interest rates.
However, while New York Community Bancorp will likely experience a short to intermediate term boost in net interest margin, this boost is likely to peak within roughly three years after which low interest rates, assuming they remain, will begin to erode the company’s net interest margin. A similar trend occurred during the last interest rate cycle, as reflected in the following chart:
