TEXT-Fitch Takes Rating Actions on Its Mid-Tier Regional Bank Group Following Industry Peer Review
NEW YORK, February 14 (Fitch) Fitch Ratings has completed a peer review of the following 16 mid-tier regional banks: Associated Banc-Corp. (ASBC), Bank of Hawaii Corporation (BOH), BOK Financial Corporation (BOKF), Cathay General Bancorp (CATY), Cullen/Frost Bankers, Inc. (CFR), East West Bancorp, Inc.(EWBC), First Horizon National Corporation (FHN), First National of Nebraska, Inc. (FNNI), First Niagara Financial Group, Inc. (FNFG), Fulton Financial Corporation (FULT), Hancock Holding Company (HBHC), People's United Financial, Inc. (PBCT), Synovus Financial Corp.(SNV), TCF Financial Corporation (TCB), UMB Financial Corp.(UMBF), Webster Financial Corporation (WBS).
For additional information on individual ratings drivers and sensitivities see individual press release for each company.
RATING ACTION AND RATIONAL
Fitch revised ratings or outlooks for CATY, FULT, FNNI, TCB, SNV and UMBF.
CATY's Issuer Default Rating (IDR) was upgraded to 'BB+' from 'BB', and the Outlook was revised to Stable from Positive. The ratings change reflects CATY's improving operating performance as measured by return on assets (ROA), as well as continuation of its improving asset quality and capital levels.
FULT's ratings were downgraded to 'BBB+' from 'A-', and the Outlook remains Stable. The rating change reflects lagging asset quality improvements, relatively higher funding costs compared to peer and sluggish economic recovery in one of FULT's core markets.
FNNI's ratings were upgraded to 'BBB-' from 'BB+' and the Outlook was revised to Stable from Positive. The upgrade of FNNI's IDRs reflects the company's positive trend in its core operating performance, improving asset quality metrics and solid tangible and risk-adjusted capital levels.
TCB's ratings were downgraded to 'BBB-' from 'BBB', and the Outlook remains Negative. The downgrade of TCB's rating primarily reflects the company's sustained weak asset quality and consumer-oriented, higher-risk balance sheet compared to other mid-tier regional banks. The Negative Outlook reflects the view that further negative rating action could take place if credit risk is not stabilized over the near-to-mid-term causing negative earnings performance and capital deterioration.
Additionally, if the bank's relatively new strategies do not favorably impact TCB's operating results and financial condition negative ratings pressure could occur SNV's ratings were affirmed at 'BB-', and the Outlook for SNV has been revised to Positive from Negative. The Outlook revision reflects Fitch's view that credit risk has stabilized and that management will continue to address its elevated level of problem credits in the intermediate term.
UMBF's short-term IDR was downgraded to 'F1' from 'F1+'. Fitch's downgrade of UMB's short-term IDR to 'F1' from 'F1+' reflects the more typical alignment of the short-term IDR to the long-term IDR. 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.
The majority of institutions within this group have retail branch networks which reside in contiguously located state geographies - typically three to four different states. Fitch's mid-tier regional bank group has fairly homogenous business strategies. The institutions are mostly reliant on spread income from loans and investments. On average, non-interest income represents 29% of total revenues for Fitch's mid-tier bank group, while Fitch's large regional banks generate 38% of revenue from non-interest income. 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.
At the end of third quarter 2012, the median mid-tier ROA for mid-tier banks was 0.93%, which lags the median ROA for large regionals by 18 basis points (bps). 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 median ROCE was 8.4% for mid-tier banks compared to 10.3% for large regional banks. 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. The median reserve level for Mid-Tier banks was 1.7% at the end of third quarter 2012, down from a median of 2.1% at the end of 2012. RATING DRIVERS AND SENSITIVITIES Associated Banc-Corp (ASBC) ASBC's ratings were affirmed at 'BBB-'. The Rating Outlook remains Positive. The affirmation of the ratings reflects the continued maintenance of adequate capital and liquidity profiles relative to peers in addition to further improvements in ASBC's asset quality metrics in absolute and relative terms. Fitch notes that while the company's return on average assets (ROAA) has improved over the last 12 to 18 months, overall performance has been augmented through reserve releases. ASBC has taken just a $3 million provision since the fourth quarter of 2011 (4Q'11).
Further, earnings have been boosted over the last year through the rally in mortgage rates which has added over $50 million of incremental pre-tax mortgage banking income to the bottom line. The level of earnings, which are significantly below some higher rated institutions, represents the main hurdle for upwards rating momentum over the intermediate term. Over the more medium term, ratings could benefit from controlled, strategic balance sheet growth, combined with costs savings realized through efficiency measures. Conversely, a sharp reverse in asset quality trends, particularly in the growing C&I book, could negatively impact both ASBC's rating and outlook. Further, more aggressive capital management at the bank or holding company level could lead to negative rating actions. Bank of Hawaii (BOH) Fitch has affirmed and withdrawn the 'A-' rating for BOH. BOK FINANCIAL CORP (BOK) BOK's ratings were affirmed at 'A'. The Outlook remains Stable. The affirmation of ratings reflects the institution's conservative balance sheet and robust earnings profile. Earnings are one of the strongest and most diverse of the mid-tier group. Liquidity and funding profile is also strong with a 60% loan/deposit ratio, which includes a significant portion of non-interest bearing deposits. Although BOK does not have an outsized commercial loan portfolio in the energy industry, most of the economies the bank serves are considered highly correlated to the energy industry.
Therefore, any structural stress in the energy industry could pressure asset quality at BOK and ultimately ratings. Upward rating potential is considered unlikely in the near to intermediate term given the geographical concentration in the in the Oklahoma and Texas markets. Cathay General Bancorp (CATY) CATY's IDR was upgraded to 'BB+' from 'BB', and the Outlook was revised to Stable from Positive. The ratings change reflects CATY's improving operating performance as measured by ROA, as well as continuation of its improving asset quality and capital levels. With today's action, upward movement of the company's ratings is now considered limited absent significant improvement made to the company's funding profile. CATY's concentration to commercial real estate also represents a constraining factor on the company's rating. Similar to others in the industry, CATY has been originating residential mortgage loans, some of which have been held on balance sheet. Fitch remains cautious about the growth in this portfolio, which is predominantly 30 year mortgages and its ramifications on interest rate risk. Conversely, the ratings could experience negative pressure if capital management is aggressive once the MOU is settled and TARP is repaid, or if earnings and asset quality experience a reversal in trends. Cullen/Frost Bankers, Inc. (CFR) CFR's 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 net charge-offs 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. 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. East West Bancorp, Inc. (EWBC) EWBC's ratings were affirmed at 'BBB'. The Outlook remains Stable. The affirmation of ratings reflects EWBC's strong operating performance and improving asset quality. EWBC's ROA and net interest margins (NIM) are second highest in the mid-tier group.
Fitch makes various adjustments to EWBC's reported earnings related to purchased loan accretion, and the indemnification asset. Excluding these items, the adjusted ROA and NIM are solid at 1.33% and 4.06% for the nine months ending 2012, respectively. EWBC has managed to lower its cost of funding, primarily through lower FHLB and time deposit balances; however, long-dated repo agreements continue to drag the NIM to the tune of 24 bps. Fitch acknowledges that the NIM could see some downward pressure as EWBC continues to replace run-off in its covered loan portfolio with assets originated at lower yields. Any presumed pressure to EWBC's NIM would be in line with peers. EWBC's ratings are considered to be at the higher end of their potential range in the medium term given the reliance on spread income and aggressive C&I growth. Any upward ratings momentum would be driven by a mature loan portfolio with performance history and an increase in fee income to be in line with EWBC's peer group.
EWBC's rating could be downgraded if direct exposure to China increases, substantial deterioration in asset quality occurs or earnings come under pressure. First Horizon National Corporation (FHN) FHN's 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.
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 bp 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.
First Niagara Financial Group, Inc. (FNFG) FNFG's ratings were affirmed at 'BBB-'. The Rating Outlook remains Negative. The rating affirmation and Negative Outlook reflects Fitch's view that FNFG's current capital position is lean providing limited flexibility should challenges arise given significant loan growth through acquisitions, heightened integration risks and the modest increase in risk profile of the company. 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 7.59%, 5.87%, and 9.51% for 3Q'12, respectively.
To date, asset quality is solid. NCOs and NPAs (which includes troubled debt restructuring and acquired loans) stood at 0.21 and 1.85% for 3Q'12. However, Fitch notes that the company's risk profile has modestly increased given riskier investment securities such as CLO holdings and the loan portfolio mix has shifted to more commercially-oriented loans. The loan portfolio includes exposure to highly leveraged transactions, asset-based lending, credit cards, indirect auto, and syndications. Given economic uncertainties, credit losses may increase from historical standards. Further, Fitch believes the company's capital build may be prolonged versus its initial expectations. Although FNFG's core operating revenues continue to be reasonable, in Fitch's view, forecasted earnings may also be complicated by the difficult economic and low interest rate environment. 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. Conversely, negative ratings action could occur if asset quality trends deteriorate. Additionally, although not anticipated, an acquisition in the near term or aggressive capital management could negatively impact ratings.
First National of Nebraska, Inc. (FNNI) FNNI's ratings were upgraded to 'BBB-' from 'BB+' and the Outlook was revised to Stable from Positive. Today's action reflects the company's more stable operating performance, improvements in asset quality ratios, as well as stronger regulatory capital ratios. FNNI's earnings profile has improved, as it has recorded fewer one-time gains and more recent earnings metrics are reflective of core operations. FNNI's earnings and profitability have improved as the company has pursued strategic partnerships in its credit card portfolio, which has allowed it to create alliances with the largest national and local retailers. The company's PPNR, as a measure of core performance, has improved 152 bps over the last 12 months. FNNI's loan portfolio has experienced positive credit trends as both past due loans and non-accruals loans were down significantly year-over-year. Absolute levels of NPLs have decreased 60% since year-end 2009 (YE09), while classified and special mention assets have also experienced a similar trend. Although NPAs remain elevated, relative to other mid-tier peers, Fitch expects asset quality to continue improving, albeit at a slower pace, in the near-to-medium term. Historically, Fitch has considered FNNI's capital management to be aggressive; however, the company has since improved its capital ratios which have been boosted through retained earnings, the sale of FNNI's merchant processing business, and more optimal levels of risk-weighted assets.
FNNI's risk based Tier 1 ratio was in excess of 13% at 4Q'12 compared to 10.50% in fiscal year 2010 (FY10). Although capital levels are closely aligned to the mid-tier peer averages, Fitch will closely monitor any capital erosion resulting from distribution to shareholders. With today's action, further upward movement of the company's ratings are considered limited. Significant improved in asset quality, and earnings would result in further movement of the rating, however Fitch does not anticipate this to be the case in the medium term. Fulton Financial Corporation (FULT) FULT's ratings were downgraded to 'BBB+' from 'A-', and the Outlook remains Stable. The rating change reflects lagging asset quality improvements, higher funding costs relative to peer, and sluggish economic recovery in one of FULT's core markets. Although Fitch believes FULT is well reserved, the level of NCOs has not declined at the rate of other 'A-' rated institutions who took the bulk of their credit losses in 2010.
Additionally, Fitch expects capital levels will remain relatively flat in the near term as the company looks to improve shareholder returns through dividends and share repurchases. Fitch believes FULT is solidly situated at its 'BBB+' rating. Further ratings improvement is unlikely in the near term given higher funding and credit cost relative to more highly rated institutions. Negative ratings pressure could occur if credit metrics deterioration or if tangible capital levels are significantly reduced. Hancock Holding Company (HBHC) HBHC's ratings were affirmed at 'BBB+'. The Outlook remains Stable. Fitch's rating action is reflective of HBHC's conservative operating philosophy, satisfactory operating performance, and good capital ratios. Given that HBHC has over the last couple of years been focused on integrating the operations of Whitney Holding Corporation into its operations, Fitch believes that HBHC's franchise has been enhanced through a more diversified loan portfolio, incremental opportunities for growth, as well as the ability to cross-sell additional products to existing customers. Additionally, Fitch believes that the continued integration will afford HBHC the opportunity to realize additional cost savings which should provide a modest boost to earnings.
Fitch would note, however, that a more meaningful pick-up in earnings generation is predicated on significant loan growth and cross-selling, both of which Fitch believes are more intermediate term to potentially longer-term opportunities. Fitch believes there is limited upside to HBHC's ratings or Rating Outlook should the company continue to improve profitability over a very extended period through both cost savings as well as loan growth, all while maintaining good capital ratios. Risks to the ratings include the pursuit of another large acquisition, or if Fitch were to surmise that the company was reducing pricing and terms and conditions to win large amounts of new business, which could impact profitability and credit costs over time. People's United Financial, Inc. (PBCT) PBCT's ratings were affirmed at 'A-'. The Outlook remains Stable.
The affirmation of PBCT's ratings is supported by the company's solid capital levels and history of limited credit losses throughout the credit cycle. PBCT's announced stock repurchase plan during the fourth quarter of 2012 was anticipated by Fitch and was already assumed in our current and prior ratings. That said, further reductions of TCE beyond median levels for mid-tier banks could result in negative ratings action. PBCT's current rating has limited upside given an earnings profile that lags its rated peers and a loan to deposit ratio that's amongst the highest of the mid-tier group. Synovus Financial Corp. (SNV), SNV's ratings were affirmed at 'BB-' and the Outlook was revised to Positive from Negative. The Outlook revision to Positive from Negative reflects Fitch's view that credit risk has stabilized and that management will continue to address its elevated level of problem credits in the intermediate term.
Further, Fitch believes that capital levels are now sufficient to absorb future credit losses as they occur and are adequate relative to the company's rating level. The ratings affirmation reflects the company's high level of NPAs (inclusive of accruing TDRs) in both relative and absolute terms as well as a weak earnings profile going forward. Fitch notes that SNV management has made modest progress in addressing the company's high risk profile and stabilizing its balance sheet through loan sales, loan workouts and equity raises over the last 12 to 24 months which will likely lead to more positive operating results going forward. This is evidenced by management's reversal of $800 million in reserves held against the company's deferred tax asset (DTA) which significantly boosted core capital at year end 2012. However, SNV's asset quality remains noticeably worse than other higher rated credits in the peer group reviewed and continues to be a negative rating driver. Further, in Fitch's view, core earnings performance will continue to lag peer institutions as credit costs will continue to weigh on the bottom line.
Fitch notes that sustained positive AQ trends leading to consistently positive earnings performance and capital augmentation could result in positive rating action in the intermediate term. Fitch expects the outstanding MOU to be terminated as well as CPP preferred shares being paid off in 2013. As communicated in the past by Fitch, both of these events could result in positive rating action. Conversely, a sharp reversal in AQ trends resulting in negative earnings performance and capital deterioration would likely result in adverse rating action. Further, any abnormal delay in paying back TARP prior to the dividend rate reset rate could cause Fitch to reevaluate SNV's ratings or Outlook. TCF Financial Corporation (TCB) TCB's ratings were downgraded to 'BBB-' from 'BBB'.
The Outlook remains Negative. The downgrade of TCB's long-term and short-term ratings primarily reflects the company's sustained weak asset quality and consumer-oriented, higher-risk balance sheet compared to other mid-tier regional banks. More specifically, Fitch remains concerned about the company's level of exposure to consumer real estate relative to capital that has been thinned out through strategic balance sheet restructurings as well as the relatively lower level of readily available liquidity on balance sheet.
The Ratings Outlook at Negative reflecting the view that further negative rating action could take place if credit risk is not stabilized over the near-to-mid-term causing negative earnings performance and capital deterioration or if the bank's relatively new strategies do not favorably impact TCB's operating results and financial condition. In the long term, if legacy credits show improving trends TCB's ratings or Outlook could be positively impacted. Conversely, TCF's ratings are sensitive to asset quality trends, which, if remain volatile and negative, could result in adverse rating action. Further, if the company's relatively new national lending strategies such as near-prime auto lending fail to positively impact the company's operating results and overall financial condition, Fitch could take negative rating action.
UMB Financial Corp. (UMBF) UMB's short-term IDR was downgraded to 'F1' from 'F1+'. Fitch's downgrade of UMB's short-term IDR to 'F1' from 'F1+' reflects the more typical alignment of the short-term IDR to the long-term IDR. The long-term IDRs of UMBF have been affirmed at 'A+'. Fitch continues to regard UMB's conservative funding and liquidity profile to be key rating strengths. UMB has demonstrated a long history of conservative management and oversight, which has guided the company successfully through multiple business cycles over the last several years, consistently delivering solid operating performance and maintaining good credit quality, which Fitch expects will continue. Fitch anticipates the company will maintain its strong operating results over an intermediate to long-term horizon. Webster Financial Corporation (WBS) WBS's ratings were affirmed at 'BBB'.
The Outlook remains Stable. The affirmation is supported by WBS's improving profitability and asset quality trends in line with Fitch's expectations. The Stable Outlook reflects Fitch's view that WBS's asset quality measures will continue to improve in the near term, credit losses will remain manageable and tangible common equity will not be reduced by more than 25 bps from 3Q'12 levels. WBS's tangible common capital ratio is near the lower end of its rated peers. At current levels, Fitch views WBS's capitalization as a constraint for further positive ratings action. Conversely, Fitch believes that WBS's IDRs have limited upside in the near term given lower capital levels compared to peers, elevated problem assets and earnings headwinds to confront in the coming quarters. Additionally, stagnant or deteriorating asset quality metrics such as NPAs or charge off rates could result in negative ratings pressure.