New York Community Bancorp: M&A Rumor Winner

NEW YORK ( TheStreet) -- New York Community Bancorp ( NYCB) was the sector winner on a mostly down Tuesday for bank stocks, with shares rising 1% to close at $13.97.

The company has been holding discussions to acquire OneWest Bank of Pasadena, Calif., according to a Reuters report that cites three unnamed sources.

OneWest Bank is the former IndyMac Bank, which failed in July 2008 and was then run under FDIC conservatorship until being sold to private equity investors in March 2009.

M&A speculation drove an upgrade of New York Community Bancorp's shares to an "outperform" rating from a "market perform" rating on March 6 by KBW analyst Collyn Gilbert.

In a report, the analyst said "an acquisition for NYCB could prove to be a positive catalyst for the shares," and among several possible targets, Gilbert said "we tend to think OneWest could be the most suitable."

OneWest's mortgage-focused business model is similar to that of the failed AmTrust Bank of Cleveland, which New York Community Bancorp purchased from the Federal Deposit Insurance Corp. in December 2009. In addition to the similarity with AmTrust, Gilbert said OneWest was a likely candidate because of "limited competition among other potential buyers."

New York Community Bancorp had $44.1 billion in total assets as of Dec. 31, while OneWest had $25.9 billion in total assets. A combination of the two banks would be a major transformation for New York Community, bringing it well above the $50 billion size for a "systemically important financial institution," (SIFI) in the eyes of regulators.

New York Community CEO Joseph Ficalora at a conference on March 4 said the company was "actively working toward getting regulatory approval so as to be a SIFI bank -- a bigger bank." He added that "it is our intent to do whatever the necessary work is to get that approval because, in the environment ahead, there will be opportunities to create great value for shareholders by doing, at least in our case, first a large deal and then whatever other deals we need to do."

The SIFI status will certainly bring up the subject of New York Community Bancorp's quarterly dividend of 25 cents a share, for a dividend yield of 7.16%. That's the highest yield on common shares for actively traded U.S. banks, according to Thomson Reuters Bank Insight.

Please see TheStreet's 10 Buy-Rated Bank Stocks With Highest Dividend Yields for details on other bank stocks with high dividend yields.

New York Community Bancorp reported 2012 net income of $501.1 million, or $1.13 a share, increasing from $480.0 million, or $1.09 a share in 2011. Some analysts have questioned New York Community Bancorp's ability to continue paying out nearly all of its earnings, especially if the company becomes an SIFI.

When discussing the possibility of the company being forced by regulators to cut the dividend if and when it is treated as an SIFI, "Ficalora said during the company's earnings conference call on Jan. 30 that "there is individual review of every bank with regard to capacity to pay. And the limitation on capacity to pay is driven by the adequacy of your capital to deal with stress. There is no indication that we aren't way overcapitalized based on the likely charges we would have to capital."

Gilbert said there was a "favorable risk/reward" in her analysis of several possible deal outcomes for New York Community Bancorp, most of which would include the company maintaining the annual dividend of $1.00 a share. But if the company is unable to complete a major acquisition, with weak loan demand continuing in a hostile interest rate environment, she said there was "potential downside" to a share price of $12.00.

A Market Pause

After seven straight winning sessions for S&P 500 ( SPX.X) Index, investors' excitement over the U.S. economic recovery seemed to fade. The S&P and Nasdaq Composite indices saw slight declines, while the Dow Jones Industrial Average rose slightly.

ManpowerGroup on Tuesday released the results of its quarterly survey of employers, saying that "hiring decision makers continue to take a measured but optimistic approach to hiring plans for Quarter 2 2013."

"Of the more than 18,000 employers surveyed, 18 percent expect to add to their workforces in Quarter 2 2013, while 5 percent expect a decrease in payrolls, resulting in a Net Employment Outlook of +13%," Manpower said. On a seasonal adjusted basis, the Net Employment Outlook was +11%, increasing from 10% both in the previous quarter and a year earlier, the staffing company.

The Commerce Department will report retail sales for February on Wednesday, which could be of concern to investors monitoring the economic recovery, in light of the recent gas price increases and the end of the 2% cut in Social Security payroll taxes in January. Many consumers didn't feel the effect of the payroll tax increase until the middle of January, so the February retail sales numbers could further dampen investors' enthusiasm.

Bank stocks led the market lower on Tuesday, with the KBW Bank Index ( I:BKX) down 1% to close at 56.69, with all but two of the 24 index components seeing declines for the session.

No Dividend Party for Citi

The Federal Reserve last Thursday announced the results of its annual stress tests for the nation's 18 largest banks last Thursday. Now investors are looking ahead to Thursday, March 14, for the regulator to announce the results of the Comprehensive Capital Analysis and Review (CCAR) of the banks' capital plans through the first quarter of 2014. Most of the big banks and many large regional banks not subject to CCAR but subject to the Fed's Capital Plan Review (CapPR), are expected to announce dividend increases and/or stock buybacks.

Citigroup ( C) fared very well in the stress tests, with the Fed saying the bank would lose $28.6 billion through the end of 2014 under the regulator's "severely adverse scenario," with a minimum Tier 1 common equity ratio of 8.3%. The tests showed Citi to have plenty of excess regulatory capital. Citi's minimum stressed capital ratio according to the Federal Reserve would be the highest among the "big four" U.S. Banks, which also include JPMorgan Chase ( JPM), Bank of America ( BAC) and Wells Fargo ( WFC).

But investors will have to wait at least another year for a dividend increase. Citigroup last Thursday jumped the gun by announcing it had requested Federal Reserve approval for $1.2 billion in common share repurchases through the first quarter of 2014, while keeping its quarterly dividend at a nominal 1 cent per share.

Some investors were no doubt disappointed with Citigroup's announcement, however, with such a small capital return and the continued wind-down of non-core subsidiary Citi Holdings, the company's capital can be expected to continue to accumulate. Citigroup's Basel I Tier 1 common equity ratio was 12.7% as of Dec. 31, increasing from 11.8% a year earlier.

UBS analyst Brennan Hawken on Monday upgraded Citi to a "buy" rating from a "neutral" rating, with an aggressive price target of $62.00. The analyst in a report called Citigroup "a story with legs," and said Citi Holdings "could free up over $10 billion in trapped capital in just the next two years." Hawken added that Citigroup's $55 billion deferred tax asset"will release copious capital over time and we found none of that accretion is priced in today."

Citi's shares were down over 1% to close at $46.95. The shares have returned 19% this year, following a 51% return in 2011. The shares trade for 0.9 times their reported Dec. 31 tangible book value of $51.19, and for 9.0 times the consensus 2014 earnings estimate of $5.22 a share, among investors polled by Thomson Reuters. The consensus 2013 EPS estimate is $4.65.

C Chart C data by YCharts

Interested in more on Citigroup? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.


Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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