Thrifts are a dying breed. Of the 347 publicly traded US banks and thrifts with market caps over $100 million, only 61 are thrifts. Most are small; aggregate thrift market cap is about $48 billion, versus $1.4 trillion for banks.
But there are still a few large thrifts out there, and Westbury, NY-based New York Community Bancorp (NYSE:NYCB) is the largest, with a market cap of $7.2 billion. It is 50% bigger in terms of market cap than the next largest thrift, People's United Financial (NASDAQ:PBCT) (Hudson City Bancorp is the same size as PBCT, but it is the target in a pending merger.)
I've written three detailed articles about NYCB in the past, with the one I wrote in August best capturing what I think of NYCB's operating performance in recent years. To summarize briefly, I don't think highly of it. NYCB made several large acquisitions beginning in 2001; either the deals didn't work or there were problems within the "legacy" NYCB, such that the post-deal NYCB ended up with much lower EPS, even years before the financial crisis struck. Yes, I know that "charter" (pre-IPO) NYCB shareholders have realized a cumulative 3,768% return through Q3 2013, equating to a 28.6% CAGR (these figures are directly from NYCB's Q3 2013 investor presentation). I also know that an NYCB shareholder buying shares at the first trading day's close (Nov 23, 1993) would have realized a much lower cumulative return of 2,915%.
Still attractive, I grant you. But NYCB's closing share price of $16.42 on Wednesday is 53% below the all-time closing high of Feb 27, 2004. When NYCB's price began sliding due to declining EPS, the thrift didn't cut its dividend (in fact, it raised common equity rather than do this). As a result, the dividend yield ballooned from 2% to nearly 5%, and has occasionally gotten to around 10%, with a brief spike in early 2009 above this. So temporary stock price dips have done wonders for NYCB's post-2003 return calculations. Nevertheless, NYCB CEO Joe Ficalora remains unbowed. He has publicly communicated his desire to do another large deal.
NYCB's stock price is up 25.3% this year through November 27th, versus 26.7% for the S&P 500. Depending on which thrift index you compare them to (I'd recommend using a mid-cap or micro-cap index, because NYCB alone is 15% of aggregate thrift market cap), they've outperformed by 0.6-5.5%. And with NYCB's near 100% dividend payout ratio, its total return year-to-date is 34.3%, versus 29.2% for the S&P 500.
But as NYCB's stock price climbed this year, its short interest climbed too, from 6.3% at year-end 2012 to 9.4% as of November 15, 2013. The 6.3% was high relative to similarly sized peers, but not insanely so. (For comparison, JPMorgan Chase's and Wells Fargo's short interest percentages at that time were 1.08% and 0.61%, respectively.) The 9.4% is another story; among large institutions, NYCB's current short interest is second only to that of M&T Bank's 10.3%.
So what are the shorts thinking? It's possible they think that NYCB will stumble and be forced to cut its dividend, but I doubt that after all NYCB has been through that they'd cut their dividend now. I think the shorts are thinking one or both of the following: first, with a 100% dividend payout ratio, NYCB can't grow at an attractive rate. It trades like a bond, a bond that yielded 7.6% at the beginning of the year but now yields a less attractive 6.1%. Rising interest rates may do more damage to NYCB's valuation because robust earnings growth probably isn't in the cards.
The other thing they might be thinking? Ficalora is eager to do a deal. A clever seller might exploit this and demand a full price, hardly unreasonable given NYCB's inability to grow. And as the second article link mentions above, doing such a deal might lead regulators to force NYCB to materially cut its dividend payout ratio, and the dividend is the only thing that's supporting the stock right now. Even if this doesn't happen, if NYCB needs to pay target shareholders a high dividend on the NYCB shares they receive, that might choke off growth at the target, growth that NYCB is paying a deal premium for.
Ficalora may feel like he has failed if he doesn't do another big deal. I think the shorts are hoping he gets what he's wishing for.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.