TEXT-Fitch Affs First Horizon National Corp.'s IDRs at 'BBB-/F3' Following Mid-Tier Regional Peer Review

Thu Feb 14, 2013 6:23pm EST

CHICAGO, February 14 (Fitch) Fitch Ratings has affirmed the long-term and short-term Issuer Default Ratings (IDRs) of First Horizon National Corporation and its subsidiaries at 'BBB-/F3'. The Rating Outlook remains Stable. A full list of ratings follows at the end of this release.

Fitch reviewed First Horizon National Corporation 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 bank 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

First Horizon National Corporation's (FHN) ratings were affirmed at 'BBB-'. The Rating Outlook remains Stable. Fitch downgraded FHN's ratings to their current levels in December 2012 reflecting Fitch's view of FHN's ongoing future performance amidst a challenging economic environment. Fitch believes that going forward earnings will be challenged by the expected prolonged period of low interest rates, along with high credit costs related to the nonstrategic portfolio. Fitch notes that FHN has made considerable progress in shifting its strategy over the past few years, but the progress in terms of returning to stronger levels of profitability has been delayed, due in part to the weak economic recovery.

RATING DRIVERS AND SENSITIVITIES - IDRs and VRs

Further, whereas FHN's capital ratios were formerly strong in relation to peer capital ratios have fallen more in line with similarly rated banks. Fitch believes that current capital levels firmly plant FHN at its present rating. Moreover, capital can sustain up to a 100 basis point hit related to a potential Private Label Securitization (PLS) charge and still be sufficient to warrant a 'BBB-' rating, in Fitch's view. Finally, it is Fitch's expectation that the primary subsidiary, First Tennessee Bank, NA (FTBNA), will continue to receive regulatory approval to upstream dividends to the parent in order to cover operating expenses, service holding company debt and meet the subordinated debt maturity in May 2013 given the subsidiaries high level of Tier 1 Common capital. The inability of FTBNA to receive regulatory approval for upstreaming dividends would likely result in negative rating action.

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: First Horizon National Corporation

--Long-term IDR at 'BBB-'; Outlook Stable;

--Viability at 'bbb-'';

--Short-term IDR at 'F3';

--Subordinated debt at 'BB+';

--Senior at 'BBB-';

--Preferred stock at 'B';

--Support at '5';

--Support Floor at 'NF'. First Tennessee Bank, N.A.

--Long-term IDR at 'BBB-'; Outlook Stable;

--Viability at 'bbb-';

--Short-term IDR at 'F3';

--Long-term deposits at 'BBB';

--Short-term deposits at 'F3';

--Short-term debt at 'F3';

--Subordinated debt at 'BB+';

--Preferred stock at 'B';

--Support at '5';

--Support Floor at 'NF'. First Tennessee Capital II

--Preferred stock at 'B+'.

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