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Fitch Affirms City National's IDR at 'A-'; Outlook Stable
May 7, 2013 / 5:57 PM / in 5 years

Fitch Affirms City National's IDR at 'A-'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, May 07 (Fitch) Fitch Ratings has affirmed the Long-term Issuer Default Rating (IDR) and Short-term IDR of City National Corporation (CYN) and its lead bank subsidiary, City National Bank, at 'A-' and 'F1', respectively. The Rating Outlook is Stable. A complete list of ratings affected by this action is provided at the end of this release. RATING ACTION RATIONALE The affirmation reflects CYN's strong deposit franchise, solid asset quality and relatively lower credit costs through the cycle. These strengths are balanced against CYN's weak earnings profile which faces further headwinds in the near term. That said, Fitch believes CYN has longer term upside given its low-cost deposits, asset-sensitive balance sheet and capacity for incremental loan growth. Fitch recognizes the realization of CYN's earnings potential depends on a stronger economy to spur loan growth and higher interest rates. KEY RATING DRIVERS - IDRs and Viability Ratings Low credit costs are a key ratings driver for the institution. CYN generated a net recovery in the first quarter of 2013 and also for full-year 2012. Net charge-offs (NCO) totaled just 4bps in 2011. Fitch believes CYN aggressively identified its problem credits and took its losses early in 2009 instead of prolonging the impairment time horizon of its loan portfolio. As such, Fitch expects NCOs to remain low in the near term, while non-performing assets (NPAs) gradually revert to historical lows. CYN's solid asset quality is driven by good underwriting practices and high net worth borrowers. The strength of CYN's asset quality is reaffirmed by its solid performance despite operating in a relatively weaker economy. Excluding covered loans, loans based in California represented 80 percent of the portfolio. Commercial loans represent 44% of the loan portfolio and are the primary lending product for the company. Fitch views CYN's commercial portfolio as being relatively lower risk than commercial loan portfolios found at similarly sized banks. CYN's commercial unsecured loans typically have recourse to the borrower. This is a significant benefit to CYN, since its customer base is largely comprised of high net worth individuals. Since 2005, CYN has had a cumulative recovery rate of 36% compared to a 19% recovery rate for Fitch's mid-tier regional bank peer group. CYN's return on average assets (ROAA) totaled 0.75% in first quarter 2013 compared to 0.82% for full year 2012. Although comparatively low, Fitch considers CYN's profitability to be adequate on a risk adjusted basis, given its history of low credit losses. Fitch believes near-term profitability will face headwinds while margin compression persists. Core margin has been relatively stable but reported margin has shown much larger declines due to CYN's $990 million covered loan portfolio which has accretable yield of over 12%. Tangible capital levels dropped to 5.89% in 2012 due to loan growth and acquisitions. However, Fitch expects CYN to grow capital levels to historical norms, which is closer to 7%. In the first quarter of 2013, CYN's tangible common equity ratio was up to 6.35%. RATING SENSITIVITIES - IDRs and Viability Ratings CYN's current ratings have limited upside. Both core earnings and capital remain a drag on CYN's current ratings. Given the near-term expectation of earnings, positive ratings momentum is unlikely. Conversely, negative ratings pressure is likely if asset quality measures deteriorate or if capital ratios remain stagnant or are managed at lower levels. RATING DRIVERS & SENSITIVITIES - Subordinated Debt and Other Hybrid Securities Subordinated debt and other hybrid capital instruments issued by CYN are all notched down from CYN's Viability rating (VR) of 'a-' in accordance with Fitch's assessment of each instrument's respective non-performance and relative Loss Severity risk profiles, which vary considerably. Therefore, subordinated debt and hybrid securities are sensitive to any change in CYN's VR. KEY RATING DRIVERS - Support and Support Rating Floors CYN has a Support Rating of '5' and Support Rating Floor of 'NF'. Fitch believes that they are not systemically important and therefore, the probability of support is unlikely. The IDRs and VRs do not incorporate any external support. RATING SENSITIVITIES - Support and Support Rating Floors Fitch does not anticipate changes to CYN's Support Ratings or Support Rating Floors given its size and the lack of systemic importance of the institution. Fitch has affirmed the following ratings with a Stable Outlook: City National Corporation --Long-term IDR at 'A-'; --Short-Term IDR at 'F1'; --Viability Rating at 'a-'; --Senior Unsecured at 'A-' --Preferred Stock at 'BB' --Support Floor 'NF' --Support '5'. City National Bank --Long-term IDR at 'A-'; --Long-term Deposit at 'A'; --Short-Term IDR at 'F1'; --Short-Term Deposits at 'F1'; --Viability Rating at 'a-'; --Subordinated debt at 'BBB+'; --Market linked deposits at 'Aemr'; --Support Floor at 'NF'; --Support at '5'. Contact: Primary Analyst Jaymin Berg, CPA Director +1-212-908-0368 Fitch, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Julie Solar Senior Director +1-312-368-5472 Committee Chairperson Joo-Yung Lee Managing Director +1-212-908-0560 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: Additional information is available at ''. Applicable Criteria and Related Research: Risk Radar (April 04, 2013) U.S. Banking Quarterly Comment (April 23, 2013) U.S. Banks -- Home Equity Reset Risk Hitting the Reset Button in 2014 (Apr 29, 2013) U.S. Housing Finance GSEs: Where to from Here (Feb 28, 2013) U.S. Banks: Rationalizing the Branch 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) Global Financial Institutions Rating Criteria (Aug 15, 2012); Rating FI Subsidiaries and Holding Companies (Aug 10, 2012) Assessing and Rating Bank Subordinated and Hybrid Securities (Dec 05, 2012) Applicable Criteria and Related Research Assessing and Rating Bank Subordinated and Hybrid Securities here Rating FI Subsidiaries and Holding Companies here Global Financial Institutions Rating Criteria here Risk Radar - APAC Overview here U.S. Banking Quarterly Comment: 1Q13 here U.S. Banks -- Home Equity Reset Risk Hitting the Reset Button in 2014 here U.S. Housing Finance GSEs: Where to from Here here U.S. Banks: Rationalizing the Branch Network (Witness the Incredible Shrinking Branch Network) here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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