December 15, 2017 / 9:25 PM / 9 months ago

Fitch Affirms BankUnited, Inc.'s IDRs at 'BBB/F2'; Outlook Revised to Negative

(The following statement was released by the rating agency) NEW YORK, December 15 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDRs) at 'BBB' and Short-Term IDRs at 'F2' for BankUnited, Inc. (BKU) and BankUnited, N.A. The Rating Outlook is revised to Negative from Stable. A full list of rating actions follows at the end of this press release. The rating action follows a periodic review of the midtier regional banking group, which includes BankUnited, Inc. (BKU), BOK Financial Corp. (BOKF), Cathay General Bancorp (CATY), East West Bancorp, Inc. (EWBC), First Horizon National Corporation (FHN), First National of Nebraska, Inc. (FNNI), Fulton Financial Corporation (FULT), Hilltop Holdings Inc. (HTH), Synovus Financial Corp. (SNV), Trustmark Corporation (TMRK), UMB Financial Corp. (UMBF), Umpqua Holdings Corporation (UMPQ) and Wintrust Financial Corporation (WTFC). Company-specific rating rationales for the other banks are published separately, and for further discussion of the large regional bank sector in general, refer to the special report titled 'Midtier Regional Bank Periodic Review,' to be published shortly. KEY RATING DRIVERS IDRs, VRs, AND SENIOR DEBT BKU's ratings are supported by the company's seasoned management team, decent capital levels and stable core asset quality. Offsetting these strengths are what Fitch considers to be a relatively narrow business model concentrated in spread income and reliant on continued strong loan growth to offset the negative earnings impacts of a shrinking covered loan portfolio. The Negative Outlook reflects Fitch's view that progress towards improvement of key profitability metrics like the core net interest margin has been slower than anticipated. Fitch calculates an adjusted core net interest margin (NIM) of 2.63% (annualized) for the first nine months of 2017. With loss share agreements expected to expire in May 2019, Fitch believes that absent significant structural revenue improvements, BKU's profitability will continue to deteriorate and could likely reach levels that no longer supports the current rating level. BKU has reported a 94bps decline in its reported net interest margin over the last three years up to 3Q17. This is the highest level of margin compression of all banks in the peer group, reflecting the impact of the covered loan portfolio run-off. This was exacerbated by BKU's deposit gathering efforts over the last year as the bank has conducted promotions in a rising rate environment. BKU's cost of deposits for the first nine months of 2017 was the highest in the peer group and 45bps above the peer median. The bank's historical earnings performance over the first nine months of 2017 compares well to peers and has been an important source of capital supporting the banks comparatively high levels of loan growth. However, Fitch notes that earnings were supported by once-off items over the past year that helped offset provision-related pressures stemming from the taxi medallion portfolio. The bank reported a ROE of 10.21% and a ROAA 0.92%, which currently supports the rating level and provides much needed capital generation to support loan growth. At 11.91%, BKU's CET 1 ratio remains towards the high end of the peer group. Fitch expects BKU to operate with higher levels of capital than similarly rated peers to compensate for product concentration in the loan portfolio as well as the high levels of loan growth reported in recent years relative to peers. On Dec. 5, 2017, BKU announced it expects to book an income tax benefit in the fourth quarter of 2017 for approximately $295 million plus estimated interest, less associated professional fees and expenses. This announcement is incorporated into the rating action. While Fitch views this material once-off earnings event positively, over the rating horizon Fitch rates to BKU's core earnings and capital generation. In line with select peers in the market, BKU has encountered significant credit losses in its New York taxi medallion portfolio. While the bank no longer originates these loans, the remaining exposure stood at $120.6million or approximately 22.4% of total risk-based capital as of 3Q17. This balance is supported by a specific loan-loss allowance of 13.1million or 10.9% and is the remaining exposure after net charge-offs of $47.1 million taken year-to-date, mostly in the third quarter. The entire portfolio was placed on nonaccrual in 2017. Excluding taxi medallions, asset quality performance was good over the year. The nonperforming assets (inclusive of accruing TDRs) for the non-covered loan portfolio stood at 0.52% of gross loans and repossessed assets, 5 bps lower than 4Q16. Including taxi medallions, the NPA ratio was 1.12% and affected by the transfer of the entire taxi portfolio to nonaccrual. This still compares well to mid-tier peers and supports the current ratings. Fitch classifies BKU's risk appetite as high relative to most equally rated peers. This view is largely predicated on CRE concentration and the high historical loan growth rates as management has rapidly built out the lending franchise during the benign credit conditions experienced in recent years. Fitch positively notes that loan growth has moderated over the last year. Growth leading up to 3Q17 was 8.2% relative to the 35% CAGR between 3Q16 and 3Q13. Fitch expects that BKU's loan growth will pick up in 3Q17 and third quarter production was adversely affected by disruption from the recent hurricanes. Fitch generally has concerns over elevated loan growth as it often adversely affects management's ability to scale and maintain critical business functions like credit administration and other important business support functions. Fitch views BKU's recent moderation in loan growth over the last year as relatively credit positive although growth rates remain higher than peers. As BKU has reached a level of maturity and scale in commercial real estate lending, management plans to pivot towards other commercial lending lines to diversify the loan book and improve the bank's relatively low yields on the non-covered loan portfolio. Fitch views this move positively, provided management can achieve their return targets and it does not result in loosening of underwriting standards as the bank competes in a highly competitive markets and commercial lending products. Incorporated in the rating action is Fitch's expectation that the impact of recent hurricanes Irma and Harvey will be manageable for the bank from an earnings standpoint. BKU reported a relatively modest $5.4 million provision in 3Q17 related to the storms. Finally, the company has successfully grown deposits are a rate that exceeded loan growth in 2017. As a result, the loan-to-deposit ratio trended lower to 96.9% as of 3Q17 from 100.9% a year prior. Total deposit costs trended slightly higher by 20bps over the last year. Fitch expects further deposit cost pressures for BKU over the coming year, especially if short-term rates continue their path of normalization. LONG- AND SHORT-TERM DEPOSIT RATINGS The uninsured deposit ratings of BankUnited, N.A. are rated one notch higher than the bank's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. HOLDING COMPANY BKU's VR is 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. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities. SUPPORT RATING AND SUPPORT RATING FLOOR BKU and BankUnited, N.A. each have a Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'NF'. In Fitch's view, the probability of support is unlikely. IDRs and VRs do not incorporate any support. RATING SENSITIVITIES IDRs, VRs, AND SENIOR DEBT Fitch currently views more downside risk in BKU's ratings than upside, as reflected in the Negative Outlook. Over the Outlook horizon of 12-24 months, BKU's ratings are sensitive to further earnings deterioration such that the core ROAA ranks in the bottom quartile of the peer group for a period of 12 consecutive months. In calculating a core ROAA, Fitch will adjust for once-off items that distorts the actual core earnings performance. Fitch's annualized core ROAA for the first nine months of 2017 was 0.72%. In order to support current ratings, Fitch expects BKU to continue to operate with excess capital relative to similarly rated peers. Should BKU manage capital more aggressively than peers such that the CET 1 ratio falls below the Fitch midtier bank median, negative ratings pressure could develop. Furthermore, should BKU's asset quality metrics deteriorate at a pace that meaningfully exceeds equally rated peers, negative ratings pressure could develop, BankUnited's ratings are sensitive to key man risk. Material unexpected departures or changes in senior management at either the holding company or bank could prompt a review of the ratings. However, Fitch acknowledges that key man risk is partially mitigated by a deep bench of seasoned executives at the bank level as well as Raj Singh's appointment to CEO, which brings clarity to succession planning at the executive level. LONG- AND SHORT-TERM DEPOSIT RATINGS The long- and short-term deposit ratings are sensitive to any change to BankUnited, N.A.'s long- and short-term IDR. HOLDING COMPANY Should BKU begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is potential that Fitch could notch the holding company VR from the ratings of the operating companies. SUPPORT RATING AND SUPPORT RATING FLOOR Since BKU's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future. Fitch has affirmed the following ratings: BankUnited, Inc. --Long-Term IDR at 'BBB'; Outlook Negative; --Senior Debt at 'BBB'; --Short-Term IDR 'F2'; --Viability Rating at 'bbb'; --Support Rating at '5'; --Support Floor at 'NF'. BankUnited, N.A. --Long-Term IDR at 'BBB'; Outlook Negative; --Short-Term IDR at 'F2'; --Long-term Deposits at 'BBB+'; --Short-term Deposits at 'F2'; --Viability Rating at 'bbb'; --Support Rating at '5'; --Support Floor at 'NF'. Contact: Primary Analyst Johannes J. Moller, CFA Associate Director +1-646-582-4954 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Doriana Gamboa Senior Director +1-212-908-0865 Committee Chairperson Christopher Wolfe Managing Director +1-212-908-0771 Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entities are disclosed below: --The core net interest margin was calculated by assuming the carrying value of covered loan portfolio earns a hypothetical yield that is equivalent to the yield earned on the non-covered loan portfolio. Fitch uses the carrying value of the covered loans even though the unpaid principal balance on these loans is higher. Fitch calculates a core net interest margin of 2.63%. --The core ROAA was calculated by stripping out the excess yield and expenses associated with the covered loan portfolio. It was therefore assumed that BKU earns the same yield on its covered loan portfolio as it earned on its non-covered loan portfolio over the first nine months of 2017 and that BKU no longer booked amortization expenses associated with the FDIC indemnification asset. The revised pre-tax profits were was tax effected using a 39.5% effective tax rate arrive at an adjusted net income after-tax of $202.1 million for the first nine months if 2017. The annualized core ROAA calculated was therefore 0.72%. Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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