Fitch Takes Rating Actions on Large Regional Bank Group Following Peer Review
Fitch Ratings has completed a peer review of the following 14 rated large regional banks: BB&T Corporation (NYSE: BBT), Capital One Finance Corporation (NYSE: COF), Comerica Incorporated (NYSE: CMA), Fifth Third Bancorp (NASDAQ: FITB), Huntington Bancshares Inc (NASDAQ: HBAN), Keycorp (NYSE: KEY), M&T Bank Corporation (NYSE: MTB), PNC Financial Services Group (NYSE: PNC), Regions Financial Corporation (NYSE: RF), SunTrust Banks Inc. (NYSE: STI), US Bancorp (NYSE: USB), UnionBanCal Corporation (UBC), Wells Fargo & Company (NYSE: WFC), and Zions Bancorporation (NASDAQ: ZION). Refer to Wells Fargo's individual release for a discussion of rating actions taken on WFC. WFC's ratings were affirmed. Please click on the link below to view the complete list of affected ratings.
The actions taken to date presume that the Congress will resolve the ongoing debt ceiling debate, and avoid a U.S. government default. Failure to successfully resolve the debt ceiling issue will likely have meaningful ramifications for the economy, and for the financial industry; though this is not explicitly incorporated into today's rating actions.
RATING ACTION AND RATIONALE
Fitch revised ratings and/or Outlooks for CMA, FITB, HBAN, MTB, and STI. All other ratings and Outlooks were affirmed and maintained for the remaining banks. For banks that had changes in ratings and/or Outlook revisions, please see the separate and related press releases available on Fitch's web site.
CMA's Rating Outlook was revised to Stable from Negative supported by the company's above-peer tangible capital base, improved fundamentals such as asset quality performance, and strong funding profile.
FITB's ratings were upgraded to 'A' from 'A-' mainly reflecting the company's strong earnings profile. The company's earnings continue to trend above peer averages, and provide for good capital generation. FITB's Rating Outlook is Stable.
Fitch's upgrade of HBAN's IDR to 'A-' from 'BBB+' is supported by the company's good earnings profile, solid capital and liquidity position, and stable asset quality performance. HBAN's Rating Outlook is Stable.
MTB's rating outlook was revised to Positive from Stable reflecting mainly the consistency of the company's performance during a difficult operating environment. Additionally, Fitch views the company's solid franchise, veteran management team, and good revenue diversification as rating strengths.
STI's rating outlook was also revised to Positive from Stable, reflecting an improving overall risk profile, as well as the company's solid liquidity profile, sound capital position, and improving asset quality.
The large regional banks represent some of the highest-rated banks in Fitch's global rating universe. Accordingly, it is unlikely there will be meaningful upward rating momentum for this group collectively. However, a few institutions whose credit profiles have been demonstrating continued relative progress, such as MTB and STI, could see ratings improvement over the near- to intermediate-term, as reflected in their revised Positive Outlooks. Company-specific rating rationales are also described below, and for further discussion of the large regional bank sector in general, refer to the special report titled 'Large Regional Banks Periodic Review: The Sweet Spot of Banking in a No-Growth Environment,' to be published shortly.
RATING DRIVERS AND SENSITIVITIES - VRs and IDRs:
BBT's ratings were affirmed at 'A+/F1' reflecting the consistency of the company's performance through the credit cycle. Despite an operating footprint that was particularly hard hit, BBT remained profitable through the cycle, a testament to its strong underwriting and conservative risk culture. Although BBT has a concentration in mortgages, it has so far withstood many of the problems ailing the industry, such as relatively low mortgage repurchase costs, and has not been subject to any regulatory-related action to date. After lagging the peer group over the past several years, BBT's earnings performance has meaningfully improved, and now tracks better than the peer average, providing support to its higher relative rating.
Although the recent court ruling regarding BBT's foreign tax credits will have a meaningful impact on 3Q'13 earnings, the outcome did not adversely affect BBT's ratings given BBT's consistent track record and overall conservative management philosophy. This is still viewed as an isolated misstep on BBT's part.
As BBT is one of the highest-rated large regional banks, an upgrade is currently viewed as unlikely over the near term; however, improved profitability metrics, combined with the maintenance of an appropriate level of capital could lead to an upgrade. Conversely, failure to maintain earnings at current levels could result in negative ratings pressure.
COF's ratings were affirmed at 'A-/F1' reflecting the company's improving earnings profile, good capital position, as well as the continued integration of both ING Direct and the private-label credit card portfolios of HSBC. Additionally, credit quality for COF's heavily weighted consumer portfolio (credit cards and auto loans) continue to improve, as Fitch believes non-performing assets (NPAs) and net-charge offs (NCOs) are at cyclical lows, and as such there will be some degradation in credit over the next 12 to 24 months. That said, Fitch anticipates this expected credit degradation to be manageable, particularly given COF's improving capital and strong liquidity positions. Thus, Fitch has maintained COF's Rating Outlook at Stable.
Fitch's Stable Outlook encompasses the view that COF's good earnings performance, which has benefited from significant reserve releases, will continue, as growth in receivables will improve net interest income growth as the benefit from reserve releases begins to wane. Additionally, Fitch's viewpoint incorporates some degradation in COF's credit quality, particularly in credit cards and auto, and to a lesser extent commercial lending. Given these moving parts there is limited upside for ratings over the near- to intermediate-term time horizon. Longer-term should core earnings remain strong and credit quality manageable, there could be some upside to the rating or Rating Outlook. Alternatively, should COF pursue yet another large acquisition or begin to materially return capital to shareholders such that overall capital ratios decline, there could be some negative pressure on ratings or the Rating Outlook.
Fitch has affirmed CMA's current ratings and revised the Outlook to Stable from Negative supported by the company's above-peer tangible capital base, improved fundamentals such as asset quality performance and strong funding profile evidenced by 43% of noninterest-bearing deposits. Capitalization levels are considered a rating strength as well as consistent credit performance through various economic cycles. Further, Fitch view's CMA capital management as conservative and its tangible equity position and risk-based capital ratios have historically been higher than peers. Offsetting these strengths, CMA's financial performance continues to lag regional peers given the prolonged low rate environment and weak economy.
CMA's ratings are at the high-end of its rating potential given that financial performance is marginally in-line with similarly rated financial institutions. Conversely, although not anticipated, ratings could be negatively affected if CMA were to reduce capital below peer averages while maintaining similar loan mix within a relatively short timeframe. Further, a payout ratio (including repurchase activity) exceeding 100% would also put pressure on current ratings. In addition, a change to a more aggressive business strategy could also be a negative rating driver.
FITB's ratings were upgraded to 'A' from 'A-' reflecting the company's strong earnings profile. Earnings continue to trend above peer averages, and provide for good capital generation. Further, the company's capital and liquidity profile remains solid, and provide support for the rating action.
Although the company's NPAs are elevated from historical levels, actual losses have been manageable as of late, and reserve levels are still relatively high.
With FITB's ratings at their new higher level, Fitch does not anticipate any further upward revisions over the near- to intermediate-term given the high absolute levels. Further upward movement would be predicated on a material decline in overall problem asset levels, combined with the maintenance of above-average capital and earnings profile. Conversely, a reversal in FITB's superior earnings profile and asset quality trends, combined with a material deterioration in the liquidity and capital profile, could put pressure on FITB's earnings.
Fitch's upgrade of HBAN's IDR to 'A-' from 'BBB+' is supported by the company's good earnings profile, solid capital and liquidity position, and stable asset quality performance, which is currently in-line with 'A-' rated regional peers. Despite a difficult operating environment, HBAN has delivered solid results with return on assets (ROA) hitting an average of 1.13% and pre-provision net revenues (PPNR)/Average Asset averaging 1.70% over the last five quarters. Further, NIM compression has been more manageable versus peers.
Incorporated in Fitch's rating action is the view that these trends are sustainable given the company's improved risk profile, which should lead to credit measures returning to normalized levels and strong non-interest-bearing deposits (up 65% over the last two years) which have lowered its funding costs. Further, the company's targeted positive operating leverage should help the bottom line. Fitch also notes that HBAN has a solid capital and liquidity position. The Outlook is Stable.
Fitch does not anticipate much upward ratings potential for HBAN. Conversely, although not expected, should HBAN's performance fall below current levels, such as ROA and NIM, or credit measures weaken, ratings would come under pressure. Additionally, aggressive capital management would also be viewed negatively.
Fitch's affirmation of KEY's IDR and Stable Outlook is supported by the company's strong capital position, solid asset quality performance, enhanced liquidity, and reduced risk profile. Offsetting this, the company's earnings profile is considered weaker than most large regional banks as it consistently reports financial returns that lag peer averages.
Ratings incorporate KEY's strong capital position, which is amongst the highest of its peer group with a tangible common equity (TCE) of 9.88% at 2Q'13 and estimated Tier 1 Common ratio (under Basel III) of 10.73%. Additionally, given the company's reduced risk profile over the years, credit performance continues to be better than peers with an average NCOs of 0.50% and NPAs of 1.60% over the last five quarters.
Over the last few years, KEY has also made significant improvements to its liquidity profile by reducing its funding costs and improving its noninterest-bearing deposit base, which is up 17% for 2Q'13 compared to the same period a year ago and roughly 57% higher since 2010. Fitch also notes that the company's diversified revenue base is also viewed positively as evidenced by noninterest income contributing roughly 44% of total revenues, above the regional peer average.
Offsetting these factors, earnings measures are considered to be on the lower end versus the large regional peer group. Some of this may be attributed to the company's above-average operating costs and lower loan yields given the relatively large component of C&I tied to LIBOR rates. ROA and PPNR continue to be below large regional peers' averages, and NIM is also modest, albeit improving compared to the same period a year ago. Incorporated in the affirmation is that profitability will trend positively and reach peer averages over time. Further, the company's cost savings initiatives should also lead to improvements in profitability.
Current ratings are at the high end of rating potential given that financial performance is marginally in-line with similarly rated financial institutions. Conversely, negative rating action could ensue should the company take a more aggressive approach to capital management, such as a rapid decline of capital within a relatively short timeframe and/or a total payout ratio exceeding 100%. Unexpected changes to current business strategy or key executive management, or a declining trend in operating performance would also be viewed negatively.
MTB's ratings are affirmed with the Outlook revised to Positive from Stable. The company has consistently delivered solid financial measures and credit performance during a difficult operating environment. Additionally, Fitch views the company's solid franchise, veteran management team, and good revenue diversification as rating strengths. Offsetting these positives, MTB capital levels tends to be lower than peers. However, Fitch's believes the company's strong equity generation, good asset quality performance through various credit cycles, solid reserves when compared to net charge-offs (NCOs) and moderate dividend payout help offset the capital position. Further, MTB has continued to build its capital position from historical levels. As of 2Q'13, TCE and Tier 1 Common estimated (under Basel III) stood at 7.61% and approximately 8.10%, respectively.
Positive rating momentum could ensue should MTB successfully remediate its current BSA/AML deficiencies without any material regulatory fines and/or restrictions. Fitch would expect MTB's capital position to continue to build while maintaining strong earnings, reserves and credit performance.
Conversely, negative rating drivers would be a more aggressive approach to capital management, and/or announcing an acquisition in the near term given the sizeable Hudson City transaction. In addition, unexpected changes to current business strategy or key executive management would also be viewed negatively.
PNC's ratings were affirmed at A+ reflecting its strong risk-adjusted earnings profile, solid liquidity profile, low level of loan losses, and consistency of operating performance through the recent financial crisis. Much of PNC's rating strength is supported by its consistent track record. Although there have been some large one-time items in PNC's earnings recently, PNC's core earnings remain higher than the large regional peer averages, and the level of non-core items has tapered off throughout 2013. Further, PNC loss experience is more consistent and better than peer averages. While NPAs remain elevated for PNC, actual NCOs have been below peer averages. PNC's liquidity profile has historically been a rating strength as well, and, like the rest of its peers, PNC continues to report very solid liquidity measures, though in part attributable to the relatively anemic economic recovery.
These rating strengths are somewhat offset by a larger relative impact on capital ratios from Basel III, and some tail risk related to mortgage-related issues including pending and potential litigation, mortgage repurchase expenses, and future risk related to home equity end-of-draws.
Fitch views an upgrade as a low likelihood given PNC's already high credit rating, the challenging economic environment, and uncertain interest rate environment. However, there would be negative ratings pressure if PNC were to report meaningful deterioration in asset quality, coupled with weaker profitability metrics, or aggressive capital management.
RF's Rating Outlook remains Positive reflecting the improving overall risk profile, combined with moderating asset quality and solid capital and liquidity profiles. RF reports the second highest estimated Tier 1 common ratio (under Basel III) among the Large Regional Bank Peer Group, and one of the lowest loan-to-deposit ratios. Despite this, RF ratings remain at the low end of the large regional peer group mainly reflecting the company's weaker relative profitability and still elevated asset quality ratios.
Fitch notes that much of the improved earnings performance reflects large reserve releases. RF reported just $41 million in provision expenses in 1H'13, as compared to $324 million in NCOs. Fitch expects the level of reserve releases to continue to diminish, which will ultimately pressure earnings as RF provides for new loan growth. That said, there is still a decent amount of credit leverage available to the company as its reserves-to-loans remains amongst the highest among the large regional banks, and asset quality continues to reflect improving trends.
Ratings could be positively affected with the maintenance of core earnings at peer levels combined with a continued reduction in problem asset levels. Conversely, a sustained reversal of moderating credit trends, combined with a large decrease in capital, would likely pressure ratings; although a downgrade is viewed as remote given RF's recent progress in addressing many of its many challenges.
STI's ratings were affirmed at 'BBB+' reflecting the company's solid liquidity profile, sound capital position, and improving asset quality. The company's Outlook was revised to Positive from Stable reflecting an improving overall risk profile.
STI's risk profile benefits from a reduction in residential mortgage and home equity lending, and a material decline in problem assets. Further, its risk profile incorporates a balanced business mix, and a good degree of noninterest income. In light of the low interest rate environment and subdued economic growth, Fitch remains concerned relative to the industry's stretching for yield. Fitch notes that STI's securities portfolio continues to have very little credit risk, and its loan growth suggests a measured approach to extending credit in the current environment, characterized as having very competitive pricing. Finally, STI's interest rate risk positioning is relatively neutral, not suggesting any directional bets in its risk management.
Somewhat offsetting this, STI's earnings performance remains below large regional bank peer averages, though it does reflect an improving trend over the past several years. The improvement in reported earnings has come largely from lower provision expenses. Fitch views favorably STI's recent settlement with Freddie Mac; noting, however, that most of STI's legacy repurchase risk still resides with Fannie Mae.
Sustained and improved profitability metrics that are in line with large bank regional peers, combined with the maintenance of appropriate capital levels and the continuation of moderating asset quality, could result in positive rating momentum for STI. Fitch anticipates that resolution of the Positive Outlook may extend beyond 12 months. Conversely, deteriorating asset quality trends, combined with a lack of improvement in profitability metrics could pressure STI's current ratings, though a downgrade is viewed as unlikely.
USB's strong ratings were affirmed at 'AA-/F1+' reflecting the company's continued solid operating performance, which continues to rank at the top of the banking industry across nearly all performance measurements. Fitch believes this is due to a combination of factors, primarily USB's strong low-cost-funding advantage, extremely disciplined expense management, and a strong and long-tenured management team which has navigated the company through multiple economic cycles all while continuing to deliver strong results both on an absolute and a relative basis.
The Rating Outlook is Stable. Any upward rating momentum for USB's already strong ratings will likely be predicated on continued industry-leading operating performance over time. This includes generating better than peer-level loan growth while maintaining good asset quality metrics, continued investment in and growth of sources of non-interest income, particularly in its transaction processing and wealth management businesses, and better than peer performance at some point when short-term interest rates begin to rise. Should growing competitive factors lead USB's operating metrics to begin to decline, or should the company pursue a large acquisition that carries significant integration risk or is evidence of a significant change in corporate strategy, the Outlook could be revised to Negative, though this is viewed by Fitch as remote.
UBC's IDR was affirmed at 'A' reflecting the company's solid capitalization and asset quality, as well as stable funding with access to capital markets. Additionally, while no parent support is currently incorporated into the IDR, Fitch believes that UBC is viewed as a core subsidiary of its 100% owner, Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU).
UBC's profitability deteriorated moderately in 2012 and 2013, and remains well below the large regional bank peer average. Earnings have been pressured by the industry-wide trend of shrinking margins as well as higher overhead costs associated with acquisitions. However, provision costs and net credit losses continue to improve, and remain better than the peer average.
Fitch does not envision any near-term upside to the ratings as profitability metrics have lagged the large regional bank peer average. Ratings could be downgraded if its parent's rating (BTMU; rated 'A' with a Stable Outlook by Fitch) were to be downgraded by several notches due to the significant integration with BTMU. Additionally, should current positive capital trends reverse themselves and/or UBC enter into a material acquisition that adversely impacts leverage, ratings could be downgraded. Asset quality deterioration, particularly in the real estate or energy portfolios, would also be a negative rating driver.
ZION's ratings were affirmed at 'BBB-/F3' reflecting the company's strong liquidity and continuing improvement in asset quality metrics. Furthermore, Fitch views ZION's recent enterprise risk management enhancements positively, although the agency would like to observe how these enhancements season over time. Fitch also notes that the ratings affirmation reflects the company's improved regulatory capital ratios, though tangible capital ratios have been relatively flat.
Fitch notes that downside risk to ZION's ratings is limited. With the Rating Outlook at Positive, upward momentum to the rating is possible with improved core earnings generation as well as continued seasoning of the company's updated risk management processes and procedures. ZION's ROA, even including relatively large reserve releases as a percentage of total assets, remains near the bottom of Fitch's regional peer group. Fitch believes that solid loan growth as well as reduced expenses (the efficiency ratio was 80.23% as of 2Q'13) could help drive earnings over time. Fitch would also note that while ZION's enhanced risk management practices and procedures are viewed favorably, it would also like to observe the seasoning of these for some time before considering upside to current ratings. As a result, the Rating Outlook for ZION remains Positive.
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