Fitch Affirms Large Regional Bank Ratings Following Industry Peer Review, Outlook Stable
Fitch Ratings has completed a peer review of the following 14 rated large regional banks: BB&T Corporation (BBT), Capital One Finance Corporation (COF), Comerica Incorporated (CMA), Fifth Third Bancorp (FITB), Huntington Bancshares Inc (HBAN), Keycorp (KEY), M&T Bank Corporation (MTB), PNC Financial Services Group (PNC), Regions Financial Corporation (RF), SunTrust Banks Inc. (STI), US Bancorp (USB), UnionBanCal Corporation (UBC), Wells Fargo & Company (WFC), and Zions Bancorporation (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.
RATING ACTION AND RATIONALE
All ratings were affirmed. CMA's ratings were affirmed at 'A', but the Rating Outlook remains Negative reflecting financial performance that continues to lag regional peers. Conversely, HBAN's, RF's, ZION's Rating Outlooks were revised to Positive from Stable. HBAN's Outlook was revised due to improvements in its risk profile, earnings performance, and capital profile. RF's Outlook was revised given an improving overall risk profile with moderating asset quality and the maintenance of a solid capital and liquidity positions. ZION's Outlook was revised to Positive reflecting improving profitability, improving asset quality ratios, and on balance modestly improved capital ratios. FITB's Rating Outlook remains Positive, supported by its strong earnings profile, somewhat offset by still elevated levels of problem assets.
The Issuer Default Ratings (IDRs) span a relatively disperse set of ratings from higher rated WFC and USB (both 'AA-') to RF and ZION (both rated 'BBB-'). The majority of this peer group is rated 'A-' with a Stable Rating Outlook. The peer group is generally comprised of three groupings of banks.
The first group is comprised of USB, WFC, BBT and PNC, whose ratings are 'AA-' or 'A+', supported mainly by strong earnings profiles or moderate risk profiles. These companies have demonstrated a strong level of consistency through the most recent crisis, and stable earnings performance. Although non-performing assets (NPAs) and/or net charge-offs (NCOs) increased for these companies, the companies' capital profiles and reserves were adequate to absorb the associated losses.
The second group includes a much larger diverse set of companies whose credit profiles includes various strengths, offset by some attributes that keep them from being in the top segment. Ratings in this grouping span from 'A' to 'BBB+'/Rating Outlook Positive. Companies in this grouping include UBC, COF, CMA, FITB, KEY, MTB, and HBAN. Some of these companies continually report solid earnings, namely FITB but the ratings still incorporate elevated credit risk, or in the case of MTB, strong risk-adjusted earnings are offset by a relatively low capital position. While other companies have strong capital levels, KEY, UBC and CMA as examples, but whose core earnings profiles lag the peer group.
The last group of large regionals includes STI, RF, and ZION, companies that have lagged the large regional bank group during the financial crisis in terms of earnings and asset quality, but recently have shown improving trends. These banks are rated from 'BBB+' to 'BBB-'/Rating Outlook Positive. For these three banks, weaker relative earnings performance is considered the major weakness.
The large regional banks represent some of the highest rated banks in Fitch's global rating universe. Accordingly, it is unlikely that 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 FITB, HBAN, RF, and ZION, could see ratings improvement over the near-to-intermediate term, as reflected in their Positive Outlooks. Company-specific rating rationales are also described below, and a full list of rating actions is provided at the end of this release. In addition, for further discussion of the large regional bank sector in general, refer to the special report titled 'Large Regional Banks Periodic Review: Situated Well for a Challenging Environment,' to be published shortly.
In terms of negative ratings pressures, Fitch expects all banks to face challenges in terms of improving returns given the flat yield curve and higher capital requirements. The flat yield curve and evolving capital guidelines represent potential credit negatives over the intermediate term for those large regional banks with weaker earnings profile or capital positions. It is expected that all banks will continue to focus on reducing expenses given the expectation that rates will remain low over the next several years. The following rating actions incorporate the expectation of further compression in bank margins over the next year as higher cost deposit repricing opportunities exhaust themselves. The ratings actions also incorporate some pressure on reported net income as banks reduce the level of reserve releases, and reverse course and begin to approach more normalized levels of provisioning.
RATING DRIVERS AND SENSITIVITIES - VRs and IDRs:
BBT's ratings were affirmed at 'A+' reflecting the consistency of the company's performance through the credit cycle. Despite an operating footprint that was particularly hard hit, BBT has remained profitable, a testament to the company's strong underwriting and conservative risk culture. Although BBT has a concentration in mortgages, BBT has so far avoided a lot of the problems ailing the industry, including very low mortgage repurchase costs and not being subject to any regulatory-related action.
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 improved Outlook. Conversely, failure to maintain earnings at current levels could result in negative ratings pressure.
COF's ratings were affirmed at 'A-', primarily reflecting the company's good credit quality, adequate capital ratios, and Fitch's expectation that COF will continue to build its capital base in the wake of closing the two large acquisitions of ING Direct in the first quarter of 2012 (1Q'12), and the HSBC domestic credit card business in 2Q'12. The former acquisition added nearly $80 billion of deposits to COF's balance sheet which helped to fund the $28.2 billion of credit card receivables acquired from HSBC. As a result of these acquisitions, Fitch expects earnings over the near term to remain noisy amid merger and restructuring costs, continued acquired mortgage run-off, and various other costs/charges. Additionally, given Fitch's belief that COF's credit quality, particularly in credit cards, is nearing a potential cyclical low, Fitch would expect the company's NCO rate to modestly increase over the medium term, as COF's newer receivables season and the company expands further into the private label space, which generally has higher NCO rates. This expectation is incorporated into current ratings.
Fitch notes that upwards rating momentum for COF is generally limited given that COF is now simultaneously digesting two large acquisitions. Potential negatives to COF's ratings or Rating Outlook could include the pursuit of another acquisition of size (a deal greater than $10 billion) over the near-to-intermediate term, any large capital distributions that negatively impact capital ratios, or an unexpected and significant rise in troubled assets.
Fitch has affirmed CMA's ratings, and maintained the Rating Outlook at Negative. CMA's financial performance continues to lag regional peers given the prolonged low rate environment and weak economy. Although CMA's earnings performance improved year-over-year, profitability measures fall more in-line with 'A-' rated financial institutions. In Fitch's opinion, the prolonged rate environment will continue to weigh down CMA's future results, and Fitch is not forecasting much upside over the near term.
The current rating is supported by CMA's above-peer tangible capital base, improved fundamentals such as asset quality performance and funding profile. Capitalization levels are considered a rating strength. Fitch believes CMA's high level of tangible capital is prudent given the relatively higher risk earning-asset base. The company has always had a large concentration of C&I loans and it is the highest by a wide margin when compared to large regional peers.
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. Although not anticipated, ratings could also be negatively affected if CMA were to reduce capital below peer averages while maintaining similar loan mix within a relatively short-time frame. Further, a payout ratio (including repurchase activity) exceeding 100% would also put pressure on current ratings.
FITB's ratings were affirmed at 'A-', and the Rating Outlook remains Positive. The Positive Rating Outlook reflects FITB's stronger relative earnings profile, which is somewhat offset by weaker asset quality ratios. Although FITB's earnings profile provides positive rating momentum, FITB's asset quality represents a headwind to an upgrade over the near term. Fitch does acknowledge that despite higher than peer levels of NPAs, losses remain manageable, hovering around peer averages over the past year.
A one-notch upgrade to FITB's ratings could occur with a reduction in NPA ratios, combined with the maintenance of above average earnings, sound capital position, and strong liquidity profile. Although a downgrade is viewed as unlikely, a reversal in otherwise moderating credit trends could apply negative ratings pressure.
Fitch's affirmation of HBAN's IDR is supported by the company's solid capital and liquidity position, good core profitability, and stable asset quality performance. The Outlook has been revised to Positive. Notably, HBAN has improved its risk profile through various actions over the last few years such as disposing of Franklin Credit, reducing transactional lending and improving its capital and liquidity position. HBAN's earnings measures, credit performance and capital are now much more in-line with those of 'A-' rated large regional peers.
Despite a difficult operating environment, HBAN has delivered solid results with ROA hitting 1.19% in 3Q'12, solid PPNR/Avg Asset that has averaged 1.65% over the last five quarter periods, and NIM compression that has been more manageable versus peers. Fitch also believes many of these trends are sustainable given the company's good loan growth in C&I portfolio, credit metrics returning to normalized levels and strong non-interest bearing deposits (up 50% from a year-ago) that has lowered its funding costs.
The Outlook is expected to be resolved in next 12-18 months. Ratings could be upgraded one-notch if profitability and asset quality are maintained at current levels. Further, capital should improve given earnings retention and conservative capital management. Although HBAN's is not immune to economic pressures, Fitch would view negatively should HBAN's performance start to trend lower versus its peers. Further, should the difficult operating environment impact its stabilized credit performance, a revision to Stable would be likely.
Fitch's affirmation of KEY's IDR at 'A-' and Stable Outlook is supported by the company's strong capital position, continued credit quality improvements, enhanced liquidity, and reduced risk profile. Further, the company's recent performance is expected to remain sustainable. KEY's capital position is the highest of the peer group with a TCE of 10.44% at June 30, 2012. Ratings also incorporate the company's diversified revenue base evidenced by noninterest income contributing roughly 47% of total revenues in 2Q'12. Fitch also notes that KEY has made significant improvements to its liquidity profile with its growth of noninterest bearing deposits and reduced its risk profile over the last few years.
Offsetting, the company's earnings profile is considered weaker than peers as it consistently reports financial returns that lag its peers. PPNR continues to be below large regional peers averages. NIM is also modest, albeit improving. Incorporated in the affirmation is that profitability trends are positive and should lead to KEY pulling to peer-averages in the near term.
Current ratings are at the high-end of rating potential given that financial performance is marginally in-line with similarly rated financial institutions. 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-time frame and/or a total payout ratio exceeding 100%. Additionally, unexpected changes to current business strategy or key executive management, a declining trend from performance would be viewed negatively.
MTB's ratings are affirmed at 'A-' with a Stable Outlook reflecting the company's consistent sound financial 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 manages with capital levels lower than its peers. However, Fitch's believes the company's strong equity generation, good asset quality, solid reserves when compared to NCOs and moderate dividend payout afford MTB the ability to run with a leaner capital position.
Nonetheless, Fitch recognizes that MTB faces some potential challenges regarding Basel III. Particularly, MTB has a large portion of trust preferred securities in its capital structure which will wind down, a sizeable DTA and negative impacts from its Bayview investment and private label MBS, and its large unfunded commitments book related to commercial lending.
Positive rating momentum could ensue should MTB improve its capital position relative to peer averages 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. Additionally, unexpected changes to current business strategy or key executive management would also be viewed negatively.
PNC's ratings were affirmed at 'A+' reflecting its solid risk-adjusted earnings profile, strong liquidity profile, low level of loan losses, and consistency of operating performance through the recent financial crisis. This is somewhat offset by a larger relative impact on capital ratios from Basel III, long tail risk to the mortgage-related issues, and the realization of expected cost savings and full integration of acquired businesses related to the March 2012 acquisition of RBC Bank (USA). PNC's earnings have included several large or one-time items over the past few quarters. Fitch expects PNC to report more normalized earnings going forward, and at the higher end of the peer group.
Fitch views an upgrade as a low likelihood given PNC's already high credit rating, the challenging economic environment, and weak 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 ratings were affirmed at 'BBB-' and the Rating Outlook was revised to Positive reflecting the company's continued improvement in earnings performance, core capital position, and maintenance of a strong liquidity profile. The company's ratings also reflect the strength of the company's franchise, modest holding company leverage, and low credit risk in the securities portfolio. Nonetheless, RF ratings remain at the low end of the large regional peer group mainly reflective of the company's weaker relative profitability and still elevated asset quality ratios.
Ratings could be positively impacted with the maintenance of core earnings at peer levels, combined with a material 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 this scenario is viewed as unlikely given RF's recent progress in addressing all of its many challenges.
STI's were affirmed at 'BBB+' reflecting the company's strong liquidity profile and sound capital position. Although STI's earnings performance has improved over the past year, reported earnings are still relatively weak and below regional bank peer averages. STI's NPAs include a large percentage of accruing TDRs; however, the credit risk appears mitigated given the very high proportion that are current and have been current for several years.
Sustained and improved profitability metrics that are in line with large bank regional peers could result in positive rating momentum for STI. Conversely, deteriorating asset quality trends, combined with a lack of improvement in profitability metrics could pressure STI's current ratings.
USB's ratings were affirmed at 'AA-', primarily reflecting the company's strong earnings generation over a multi-year period which Fitch believes is due to USB's low-cost deposit base, efficient cost structure, stellar credit quality and high proportion of non-interest income. This strong performance has allowed USB to accrete capital at a significantly faster rate than several peers, which has enabled USB to return capital to shareholders and invest in future growth all while maintaining strong capital ratios. Fitch expects this level of outperformance to continue, which is reflected in USB's current ratings, which are near the top of Fitch's bank rating universe globally.
Given this ratings positioning, Fitch notes that there is very limited upside to USB's current ratings. Risks to the ratings or the Rating Outlook could result from the decision to expand the balance sheet through a large acquisition (greater than $50 billion in assets) or through a material change in corporate strategy. Though not anticipated, examples of such a shift could include USB becoming more internationally focused or more reliant on mortgage banking income.
The ratings of UBC were affirmed at 'A', which are currently rated one notch higher than the parent bank, Bank of Tokyo Mitsubishi (BTMU). Ratings are driven by intrinsic financial strength as reflected in solid capitalization, improved asset quality, stable funding with access to capital markets and consistent profitability.
Fitch does not envision any near-term upside in the ratings as profitability metrics have lagged the large regional peer universe. Ratings could be downgraded if the parent's rating is downgraded further or if current positive credit and earnings trends reverse themselves. Should UBC enter into a material acquisition that adversely impacts leverage or asset quality in the energy or real estate portfolio deteriorates, ratings could be downgraded.
ZION's ratings were affirmed at 'BBB-' and the Rating Outlook was revised to Positive, primarily reflecting the company's improving profitability, improving asset quality ratios, and on balance modestly improved capital ratios. Fitch would also note that it views ZION's ability to repay its final installment of its TARP shares in 3Q'12 positively, which also supports the Outlook revision to Positive.
Given this improvement across several fundamental yardsticks, Fitch believes there is limited downside in ZION's ratings, unless the company decided to pursue a large acquisition or the U.S. economy--primarily in the western states-- were to reverse course and materially worsen. Alternatively, should ZION's continue it improve its level of profitability and asset quality, all while enhancing capital ratios, Fitch could envision an upgrade of the company's ratings over a near-to-medium term time horizon.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the source(s) of information identified in Fitch's Master Criteria, these actions were additionally informed by information provided by the companies.
Applicable Criteria and Related Research:
--'Risk Radar' (Oct. 15, 2012);
--'U.S. Banks: Rationalizing the Branch Network (Witness the Incredible Shrinking Branch Network)' (Sept. 17, 2012);
--'U.S. Banks: Mortgage Representations and Warranties (Banks Increase Reserves; Uncertainty Remains)' (Aug. 20, 2012)
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);
--'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);
--'Basel III: Return and Deleveraging Pressures' (May 17, 2012);
--'Rating Bank Regulatory Capital and Similar Securities' (Dec. 15, 2011).
--'U.S. Banks - Sovereign Support: When Does it End' (Dec. 14, 2011).
Applicable Criteria and Related Research:
Risk Radar October 2012
U.S. Banks: Rationalizing the Branch Network (Witness the Incredible Shrinking Branch Network)
U.S. Banks: Mortgage Representations and Warranties (Banks Increase Reserves; Uncertainty Remains)
Global Financial Institutions Rating Criteria
Rating FI Subsidiaries and Holding Companies
Treatment of Unrealized Losses in U.S. Bank Capital Rule Proposal (Pro-Cyclical Capital Policy to Create Greater Capital Volatility for Banks)
Basel III: Return and Deleveraging Pressures
Rating Bank Regulatory Capital and Similar Securities
U.S. Banks ￢ﾀﾔ Sovereign Support: When Does it End -- Amended
Large Regional Bank Ratings List
Julie Solar (Primary Analyst for BBT, FITB, PNC, RF, STI, WFC), +1 312-368-5472
70 West Madison Street
Chicago, IL 60602
Doriana Gamboa (Primary Analyst for CMA, HBAN, KEY, MTB), +1 212-908-0865
Justin Fuller (Primary Analyst for COF, USB, ZION), +1 312-368-2057
Ed Thompson (Primary Analyst for UBC), +1 212-908-0364
Joo-Yung Lee, +1 212-908-0560
Brian Bertsch, +1 212-908-0549