TEXT-Fitch cuts First Niagara Financial Group's IDRs to 'BBB-'; outlook negative

Wed Sep 26, 2012 9:29am EDT

Sept 26 - Fitch Ratings has downgraded the long-term and short-term Issuer Default Ratings (IDR) of First Niagara Financial Group, Inc. (FNFG) and its subsidiaries at 'BBB-' and 'F3', respectively. The Rating Outlook is revised to Negative. Prior to today's downgrades the ratings were on Rating Watch Negative. (A detailed list of ratings follows at the end of this release.)

The downgrade and Negative Outlook reflects Fitch's view that FNFG's current capital position (following the closing of its HSBC acquisition and the balance sheet restructuring) is considered lean providing limited flexibility should challenges arise given significant loan growth through acquisitions in recent periods and heightened integration risks. Further, Fitch believes the company's capital build may be prolonged versus the agency's initial expectations. Although FNFG's core operating revenues continue to be satisfactory, in Fitch's view, forecasted earnings may be complicated by the difficult economic and low interest rate environment.

Additionally, FNFG's capital position is much lower than similarly-rated peers and most of Fitch's U.S. rated financial institutions from a tangible common equity (TCE) position and a regulatory capital standpoint. FNFG's Tier 1 Common Ratio, TCE and Tier 1 RBC totaled 7.41%, 5.69%, and 9.40% for 2Q12, respectively. For 'BBB' rated U.S. Banks, Fitch Core Capital/RWA (which is a similar measure to Tier 1 Common) average is 13.08%, TCE average is 9.08% and Tier 1 TBC is 13.73% for 2Q12. FNFG estimates that Tier 1 Common Ratio under Basel III would be reduced by 20-25 bps based at June 30, 2012.

Fitch notes that the company's risk profile has also modestly increased given riskier investment securities such as CLO holdings and the loan portfolio mix has shifted to more commercially-oriented loans. The company has also increased its lending activities in highly leveraged transactions, asset-based lending, credit cards, indirect auto, and syndicated loans. Given economic uncertainties, credit losses may increase from historical standards.

To-date, asset quality is solid and remains a rating strength. Despite the credit downturn, FNFG's NCOs and NPAs (which includes troubled debt restructuring and acquired loans) stood at 0.36% and 1.64% for 2Q12. Fitch also notes that FNFG's loan book has an estimated 3% credit mark. Although, Fitch believes NCOs will increase from historical performance given commercial loan growth, it is expected to remain manageable.

Fitch views positively that FNFG recently restructuring its investment securities book to reduce its interest rate risk related to MBS holdings. However, the company still maintains a sizeable securities book accounting for 33% of total assets at June 30, 2012. Although prepayment risk was reduced, reinvestment of future cashflows is expected to generate lower yields given rate environment.

FNFG's holding company position is considered ample to support its debt obligations and common dividend. At June 30, 2012, FNFG's parent company had $446 million in cash to service about $47 million of interest and operating expenses and about $111 million in common dividend. The company expects to manage holding company liquidity with a minimum debt service coverage ratio of 2x.

RATING SENSITIVITIES

Positive rating action or a return to a Stable Outlook may ensue should the company improve its capital position to peer averages, absent any negative asset quality trends and decline in profitability measures.

Although considered unlikely, a downgrade would be possible should FNFG announce an acquisition in the near term, manage its capital more aggressively and/or experience a change in credit quality trends materially worse than Fitch's expectations.

Fitch downgrades the following ratings with a Negative Outlook:

First Niagara Financial Group, Inc

--Long-term IDR to 'BBB-' from 'BBB';

--Short-Term IDR to 'F3' from 'F2';

--Senior Unsecured to 'BBB-' from 'BBB'

--Preferred stock to 'B' from 'B+';

--Subordinated debt to 'BB+' from 'BBB-';

--Viability to 'bbb-' from 'bbb'.

First Niagara Bank

--Long-term deposits to 'BBB' from 'BBB+';

--Long-term IDR to 'BBB-' from 'BBB';

--Short-term deposits to 'F3' from 'F2'; --Short-Term IDR to 'F3' from 'F2';

--Viability to 'bbb-' from 'bbb'.

First Niagara Commercial Bank

--Long-term deposits to 'BBB' from 'BBB+';

--Long-term IDR to 'BBB-' from 'BBB';

--Short-term deposits to 'F3' from 'F2';

--Short-Term IDR to 'F3' from 'F2';

--Viability to 'bbb-' from 'bbb'.

Fitch has affirmed the following ratings:

First Niagara Financial Group

--Support at '5';

--Support Floor at 'NF'.

First Niagara Bank

--Support at '5';

--Support Floor at 'NF'.

First Niagara Commercial Bank

--Support at '5';

--Support Floor at 'NF'.

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