CHICAGO, February 14 (Fitch) Fitch Ratings has affirmed the long-term Issuer Default Ratings (IDRs) of UMB Financial Corporation (UMB) and its lead subsidiary, UMB Bank, National Association at ‘A+'. Fitch has also downgraded the short-term IDR to ‘F1’ from ‘F1+'. The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.
Fitch reviewed UMB as part of a peer review that included 16 mid-tier regional banks. The bank’s included 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. Issuer Default Ratings 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.
Today’s action reflects UMB’s long history of conservative management and oversight by the Kemper family, 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. UMB’s operating performance, as measured through return on assets (ROA), continues to be above other mid-tier peers. Average 5Q ROA was 92 basis points (bps) compared to 77bps for the mid-tier peer group. Driving this stable performance is a low cost deposit base, low credit costs, and a sizable contribution from non-interest income.
Although not as robust as some institutions, it is remarkable given the low risk nature of the company’s balance sheet. Fitch also notes that UMB’s bottom line has been supported by gain on sale of securities, which Fitch anticipates will be more limited in nature when interest rates rise. On average, securities gains have accounted for 6% of non-interest income. UMB continues to maintain an extremely cheap deposit base, with approximately 40% of the company’s total deposits being attractive non-interest bearing demand deposits. UMB’s average cost of deposits was 26bps compared to peers that average around 50-60bps. This advantage has recently allowed UMB to win market share and drive solid loan growth of 10% from the fourth quarter of 2011 (4Q‘11) to 4Q‘12. The yields from these new loans should help to buffer the decline that lower rates are having on the company’s net interest margin (NIM).
Fitch’s rating action also incorporates UMB’s maintenance of strong credit quality over the last several years, including during the recent financial crisis. NPAs as a percentage of gross loans plus other real estate owned impressively hovered around 60bps over the last five years and well below most mid-tier peer institutions. This has meant that the company’s provision expense has remained low, which has further helped keep operating performance strong. 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. Fitch continues to regard UMB’s conservative funding and liquidity profile to be key rating strengths, and today’s action should be viewed as a realignment of the short-term IDR.
RATING DRIVERS AND SENSITIVITIES- VRs and IDRs:
Fitch notes that UMB’s ratings are at the top of their potential ratings range, and thus there is very limited upside to current ratings. Ratings could be negatively impacted, on the other hand, by a significant change in ownership structure or management that limited the involvement of Kemper family in the company’s daily operations. Other negative impacts could come from a material change in the loan portfolio or other exogenous impacts that could hurt the company’s business.
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 taken the following rating actions: UMB Financial Corporation
--Long-term IDR affirmed at ‘A+';
--Short-term IDR downgraded to ‘F1’ from ‘F1+';
--Viability affirmed at ‘a+’
--Support affirmed at ‘5’;
--Support Floor affirmed at ‘NF’. UMB Bank, National Association
--Long-term deposits affirmed at ‘AA-';
--Short-term deposits affirmed at ‘F1+';
--Long-term IDR affirmed at ‘A+';
--Short-term IDR affirmed at ‘F1+';
--Viability affirmed at ‘a+’
--Support affirmed at ‘5’;
--Support Floor affirmed at ‘NF’. The Rating Outlook is Stable.