TEXT-Fitch affirms Cullen/Frost Bankers at 'A/F1'
Feb 14 - Fitch Ratings has affirmed the long-term and short-term Issuer Default Ratings (IDRs) of Cullen/Frost Bankers, Inc., and its subsidiaries at 'A/F1'. The Outlook remains Stable. A full list of ratings follows at the end of this release. Fitch reviewed Cullen/Frost Bankers, Inc. as part of a peer review that included 16 mid-tier regional banks. The banks in the peer review include: Associated Banc-Corp., Bank of Hawaii Corporation, BOK Financial Corporation, Cathay General Bancorp, Cullen/Frost Bankers, Inc., East West Bancorp, Inc., First Horizon National Corporation, First National of Nebraska, Inc., First Niagara Financial Group, Inc., Fulton Financial Corporation, Hancock Holding Company, People's United Financial, Inc., Synovus Financial Corp., TCF Financial Corporation, UMB Financial Corp., Webster Financial Corporation. Refer to the release titled 'Fitch Takes Rating Actions on Its Mid-Tier Regional Bank Group Following Industry Peer Review' for a discussion of rating actions taken on the entire mid-tier regional banks group. The mid-tier regional group is comprised of banks with total assets ranging from $10 billion to $36 billion. IDRs for this group is relatively dispersed with a low of 'BB-' and a high of 'A+'. Mid-tier regional banks typically lag their large regional bank counterparts by asset size, geographic footprint and product/revenue diversification. As such mid-tier regional banks are more susceptible to idiosyncratic risks such as geographic or single name concentrations. Fitch's mid-tier regional bank group has fairly homogenous business strategies. The institutions are mostly reliant on spread income from loans and investments. With limited opportunity to improve fee-based income in the near term, Fitch expects that mid-tier banks will continue to face greater earnings headwinds in 2013 than larger institutions with greater revenue diversification. Share repurchases is common theme amongst the mid-tier banks. As mid-tier banks face earnings headwinds, institutions have begun repurchasing common shares to improve shareholder returns. Fitch anticipates continued repurchase activity in 2013 as the return on equity lags historical norms for the group. In addition to share repurchases, Fitch has observed that some mid-tier banks have looked to their investment portfolio to improve returns. Most notably, CLOs and CMBS have become more popular amongst mid-tier banks. Although such securities are beneficial to yields and returns, Fitch notes that such purchases can be a negative ratings driver if the risks are not properly measured, monitored and controlled. Asset quality continues to improve throughout the banking sector. Both nonperforming assets (NPAs) and net charge-offs (NCOs) are down significantly year over year. Fitch anticipates further asset quality improvement as nonperforming loan (NPL) inflow slows. Reserve levels have also declined as asset quality improves, which has been beneficial to earnings in 2012. Fitch expects further reserve releases in 2013 but at a slower pace. RATING ACTION AND RATIONALE Cullen/Frost Bankers' (CFR) ratings were affirmed at 'A'. The Outlook remains Stable. The affirmation of ratings reflects the company's solid and consistent earnings performance, strong funding and capital profiles, and nominal credit costs through the cycle. CFR has demonstrated consistent earnings through the cycle, and although reported earnings are below pre-crisis levels, they remain above peer averages. As is typical for CFR, liquidity remains very strong. With a loan-to-deposit ratio below 50%, the company has ample low cost funding to support loan growth. Fitch expects that this ratio will increase when the economy improves and CFR takes advantage of more attractive lending opportunities, but that it will always remain below industry averages. Capital remains appropriate in light of CFR's risk profile, and NCOs continue to remain well below peer averages. Fitch continues to highlight CFR's portfolio of state and municipal bond securities, which represents approximately 12% of assets. Most of these securities are guaranteed by the Texas Permanent School Fund (TPSF), which is rated 'AAA' by Fitch. While these bonds have historically performed well, CFR does have a concentration with one guarantor, albeit highly rated. Fitch views a downgrade or nonperformance of the TPSF as remote, but one that would have meaningful consequences for CFR. RATING DRIVERS AND SENSITIVITIES - IDRs and VRs Fitch views an upgrade from CFR's current ratings as unlikely as CFR is one of the highest rated banks in the U.S. Conversely, a downgrade could occur if there is material deterioration in asset quality, earnings or capital, though given CFR's consistency and track record through the most recent crisis, this is also viewed as unlikely. RATING DRIVERS AND SENSITIVITIES - Support Ratings and Support Floor Ratings: All of the mid-tier regional banks in the peer group have Support Ratings of '5' and Support Floor Ratings of 'NF'. In Fitch's view, the mid-tier banks are not considered systemically important and therefore, Fitch believes the probability of support is unlikely. IDRs and VRs do not incorporate any government support for any of the banks in the mid-tier regional bank peer group. RATING DRIVERS AND SENSITIVITIES - Subordinated Debt and Other Hybrid Securities: Subordinated debt and hybrid capital instruments issued by the banks are notched down from the issuers' VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. The ratings of subordinated debt and hybrid securities are sensitive to any change in the banks' VRs or to changes in the banks' propensity to make coupon payments that are permitted but not compulsory under the instruments' documentation. RATING DRIVERS AND SENSITIVITIES - Holding Company: All of the entities reviewed in the mid-tier regional bank group have a bank holding company structure with the bank as the main subsidiary. All subsidiaries are considered core to parent holding company supporting equalized ratings between bank subsidiaries and bank holding companies. IDRs and VRs are equalized with those of its operating companies and banks reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. RATING DRIVERS AND SENSITIVITIES - Subsidiary and Affiliated Company Rating: All of the entities reviewed in the mid-tier regional bank group factor in a high probability of support from parent institutions to its subsidiaries. This reflects the fact that performing parent banks have very rarely allowed subsidiaries to default. It also considers the high level of integration, brand, management, financial and reputational incentives to avoid subsidiary defaults. Fitch has affirmed the following ratings: Cullen/Frost Bankers, Inc. --Long-term IDR at 'A'; Rating Outlook Stable; --Short-term IDR at 'F1'; --Viability at 'a'; --Subordinated debt at 'A-'; --Support at '5'; --Support floor at 'NF'. Frost National Bank --Long-term IDR at 'A'; Rating Outlook Stable; --Short-term IDR at 'F1'; --Long-term deposits at 'A+'; --Short-term deposits at 'F1'; --Viability at 'a'; --Support at '5'; --Support floor at 'NF'. Cullen/Frost Capital Trust II --Preferred stock at 'BBB-'. Additional information is available at www.fitchratings.com. The ratings above were unsolicited by and have been provided by Fitch as a service to investors. Applicable Criteria and Related Research: --'Risk Radar' (Jan. 16, 2013); --'U.S. Banks: Rationalizing the Branch Network (Witness the Incredible Shrinking Branch Network)' (Sept. 17, 2012); --'U.S. Banks: Mortgage Representations and Warranties (Banks Increase Reserves; Uncertainty Remains)' (Aug. 20, 2012) --'Global Financial Institutions Rating Criteria' (Aug. 15, 2012); --'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012); --'Treatment of Unrealized Losses in U.S. Bank Capital Rule Proposal (Pro-Cyclical Capital Policy to Create Greater Capital Volatility for Banks)' (Aug. 7, 2012); --'Basel III: Return and Deleveraging Pressures' (May 17, 2012); --'Assessing and Rating Bank Subordinated and Hybrid Securities' (Dec. 05, 2012). Applicable Criteria and Related Research: Risk Radar Update U.S. Banks: Rationalizing the Branch Network (Witness the Incredible Shrinking Branch Network) U.S. Banks: Mortgage Representations and Warranties (Banks Increase Reserves; Uncertainty Remains) Global Financial Institutions Rating Criteria Rating FI Subsidiaries and Holding Companies Treatment of Unrealized Losses in U.S. Bank Capital Rule Proposal (Pro-Cyclical Capital Policy to Create Greater Capital Volatility for Banks) Basel III: Return and Deleveraging Pressures Assessing and Rating Bank Subordinated and Hybrid Securities
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