Why New York Community Bancorp Stock Is Up Today

New York Community Bancorp (NYCB 10.98%) has new leadership and $1.05 billion in new equity capital. Investors appear to believe the steps will be enough to save the floundering bank, sending shares up 11% as of 10 a.m. ET.

A cash lifeline from well-connected sources

We are barely a year removed from the mini banking crisis that doomed Silicon Valley Bancorp, and investors in recent weeks have been worried another bank might be on the brink of failure. New York Community Bancorp shares have plummeted in the weeks since it slashed its dividend, reported an unexpected loss, and said that “decisive” actions were needed to build capital.

On Tuesday, the stock plunged on reports that the bank was scrambling to raise new capital. But now that the deal is done, investors appear to be taking a second look.

New York Community has named Joseph Otting, the former head of the Office of the Comptroller of the Currency, as CEO and announced it has raised more than $1 billion from a group led by former Treasury Secretary Steven Mnuchin. The deal, brokered in consultation with U.S. bank regulators, adds to New York Community’s capital buffer.

Mnuchin, a former Goldman Sachs partner, has a track record here. During the financial crisis in 2008, he was part of a group that took control of the failed IndyMac Bank and eventually turned a profit when selling it to CIT Group.

Is New York Community a buy following its big cash infusion?

The deal makes it more likely that New York Community will survive, but it doesn’t necessarily make the stock a more attractive investment. The capital comes at a steep cost to existing investors, priced at $2 per share compared to the current stock price above $3.80 per share.

The issuance of new stock, combined with the convertible preferred shares on the books, would result in doubling the share count. That means all existing holders took a 50% haircut because of the equity infusion.

Looking forward from here, at best, New York Community is a troubled institution that will take time to turn around and could need further cash injections. At worst, the move was too little, too late.

Given the risks and the prolonged timetable for recovery, investors should stick to other bank stocks if considering investing in the sector.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.

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