Pressure on lending margins could dampen profits for two multifamily-loan specialists in the New York metropolitan area, according to Keefe, Bruyette & Woods Inc.
On Tuesday the firm downgraded Independence Community Bank Corp. of Brooklyn to "market perform" from "outperform." It cut its forecast of 2005 per-share earnings by 10 cents, to $3.25, and of 2006 earnings by 20 cents, to $3.55.
In a follow-up research note issued Wednesday, Keefe Bruyette analyst Robert Hughes endorsed the $17 billion-asset company's focus on multifamily and commercial lending but said he is "less positive on the outlook for growth and profitability for lending." The company will suffer "slight" margin compression this year, Mr. Hughes wrote.
Mr. Hughes initiated coverage Tuesday for New York Community Bancorp Inc. of Westbury with an "underperform" and set per-share earnings estimates at $1.30 for 2005 and $1.35 for 2006. The company faces a "number of challenges and risks" despite the changes it made to its balance sheet, he wrote.
James M. Ackor, an analyst with Royal Bank of Canada's RBC Capital Markets, said multifamily lending volume is slowing because refinancing has slowed. Refinancing had generated 15% to 20% growth in multifamily lending for many banks, Mr. Ackor said Wednesday, but higher rates have made such volume more challenging.
Increased competition for originations has put pressure on margins, as has a flattening of the yield curve, he said. "That translates into thinner spreads for companies that put this on their balance sheet."
New York Community's appetite for risk worried investors and analysts last year. In April, when the $26.5 billion-asset company reported first-quarter earnings, it announced that it had added $2.6 billion of securities, mostly mortgage-backed paper, and $2.7 billion of wholesale borrowings. But later in the second quarter it sold a large chunk of securities, and in the third quarter it reduced the portfolio by 11.3%, to $5.5 billion, in a restructuring of its balance sheet.
James Abbott of Friedman, Billings, Ramsey & Co. Inc. said there is significant downside to New York Community's stock. Even after a restructuring charge it took in the second quarter "a substantial amount of interest rate risk … looms on the balance sheet," he said.
Independence Community and New York Community were reportedly on the block late last year. But in New York Community's case, its restructuring its balance sheet was considered a sign that it was trying to correct its problems and was not preparing to sell itself.
As for Independence Community, Anthony R. Davis of BankAtlantic Bancorp Inc.'s Ryan Beck & Co. Inc. said he doubts it ever planned to sell.
"Given the opportunity that Independence has in that market and its flexible operating model," Mr. Davis said, it probably did not think it was "running out of growth opportunities and needed to think of an exit strategy."
Executives from Independence Community and New York Community declined to discuss the KBW research note. Shares of Independence Community fell 2% on Wednesday; those of New York Community fell 1.17%.
