New York Community Bancorp (NYCB) is hoping its stellar reputation buys it some grace as it gets closer to entering the realm of the country's largest banks.
The Westbury company, with $47.6 billion in assets, is nearing the $50 billion threshold where regulators will consider it a systemically important financial institution. With that designation comes a slew of added oversight and rules as to how the company operates and how management manages its capital.
The capital rules might be the toughest pill to swallow. For the past decade, New York Community has paid a dividend that adds up to $1 a share each year. In 2013, that equaled 94% of its earnings. Dividend rules for SIFIs call for close scrutiny for payouts that exceed 30% of earnings.
"The biggest and most obvious issue for them going over $50 billion is the dividend. It is basically sacrosanct for the company," says Mark Fitzgibbon, director of research at Sandler O'Neill. "It is highly unlikely they are going to be allowed to pay that ratio, so they'll have to find an acquisition that is highly earnings accretive."
New York Community should be able to make a case to regulators to keep the dividend intact, says Joseph Ficalora, the company's chief executive. He points to the company's performance during the last economic downturn and its focus on multifamily lending in New York. Such loans have made up roughly 70% of New York Community's loan portfolio for decades.
"The fixing of a 30% payout ratio has a great deal to do with the desire of the regulator for those institutions to focus on building capital," Ficalora says.
"We have demonstrated that we have not needed to go to capital... to deal with the worst economic downturns that have occurred in the last four decades," Ficalora adds. "On a specific basis, no regulator would need to look at us and say, 'You have to restrain your dividend because you need to build your capital.'"
Analysts say the company, while perhaps deserving of an exception, is unlikely to get one.
"They've done some really good things and have consistently performed well, but it would be naive to expect that the regulators are going to treat them differently from any other big bank," Fitzgibbon says.
Ficalora has more than one angle in his efforts to leave the payout ratio unchanged. He says that, while regulators are scrutinizing dividend payouts higher than 30%, they are allowing several SIFIs to have significantly higher ratios when stock repurchases are factored in.
The 18 SIFI banks covered by Raymond James are expected to have an average dividend payout ratio of 23% this year, but a total payout ratio of 59%, researchers for the firm noted in March. Bank of New York Mellon (BK), Northern Trust (NTRS), State Street (STT) and Wells Fargo (WFC) had expected total payout ratios this year that exceed 90%.
It is bad policy for regulators to pick one form of shareholder payout over another, Ficalora says, adding that consistent dividends are consequential.
"There are plenty of constituents who have the capacity to let their politicians know that they need to intervene and the chances of that happening down the road are real," Ficalora adds.
An act of Congress might not be necessary to change the status quo of payouts among the biggest banks, says Anthony Polini, an analyst at Raymond James. The industry may just need a big bank to push regulators for an evolved view of the payouts.
"It doesn't say you're not allowed to pay more than 30%," Polini says. "Regulators could look at it more from a total payout perspective. There just needs to be someone to break that ice and maybe it is New York Community."
Regulators likely prefer buybacks because they are finite events, whereas dividends are perpetual and changes are disruptive, Fitzgibbon says.
"Buybacks are not an ongoing drain," Fitzgibbon adds. "You announce a 5% buyback and you can quantify that on the ratios. With a dividend, there is more at stake. Once you put it in place, any decreases or changes can send negative signals."
The SIFI designation kicks in after an institution has $50 billion in average assets over four quarters, so it could still take a year or more before New York Community enters that territory with organic growth. But Ficalora, has said repeatedly that the company would likely cross the threshold with a significant acquisition rather than tip-toe over it organically.
The banking industry views the long-delayed acquisition of Hudson City Bancorp (HCBK) by M&T Bank (MTB) as a sign that regulators do not favor deals involving bigger banks. Ficalora asserts that his company's reputation should help it complete a deal.
"We have a stellar track record of integrating deals extremely quickly and successfully," Ficalora says. "Every deal we've done has created a more-efficient operating environment. We're in a good position to make the case that we're a good consolidator of banks."
Given that New York Community has been looking for a monumental deal for a few years, some analysts wonder if the right target exists. Ficalora says there is no shortage of interested banks; his management team is just being judicious. "Every major player [U.S. investment bank] has brought us deals in the last couple of months," Ficalora says.
"The ability for us to get a deal done is very real," he adds. "The timing is unclear. The obvious need is to work closely with our regulators and get their confidence first and then negotiate the particulars of the deal."