Fitch Affirms BBVA Compass Bancshares, Inc.'s L-T IDR at 'BBB+'; Outlook Stable
OREANDA-NEWS.Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) for BBVA Compass Bancshares, Inc. (BBVAC) at 'BBB+' and the bank's Viability Rating (VR) at 'bbb'. The Rating Outlook is Stable.
This action follows Fitch's recent rating action on BBVAC's parent company, Banco Bilbao Vizcaya Argentaria SA (BBVA). Refer to Fitch's press release titled 'Fitch Affirms Santander and BBVA at 'A-'; Outlook Stable' (dated May 13, 2016) for additional information on the BBVA rating action.
A full list of rating actions follows at the end of this press release.
KEY RATING DRIVERS
IDRS AND SENIOR DEBT
BBVAC's IDR reflects the higher of its support-driven IDR or its standalone rating, the VR. BBVAC' support-driven IDR is 'BBB+', while its stand-alone rating or VR is 'bbb'.
BBVAC's institutional support-driven IDR is higher than its VR, which reflects the parent's ability and propensity to provide support to BBVAC. BBVAC accounts for approximately 12% and 11% of consolidated parent assets and revenues, respectively.
VR
BBVAC's VR, which reflects the company's intrinsic creditworthiness absent any extraordinary support, was affirmed at 'bbb' primarily reflecting the company's solid capital position, and good asset quality profile. The ratings are constrained primarily by a weaker earnings profile, and higher energy-related exposure.
Capital remains good, with a Common Equity Tier 1 under Basel III of 10.64%, on a transitional basis, up slightly from a year ago. This compares to the large regional bank peer median of approximately 10.7%. BBVAC's capital requests have been modest to date, with relatively small dividends upstreamed to the parent. The company has one of the lowest total payouts in the peer group, incorporating only dividend payments. Fitch expects BBVAC to manage its capital profile conservatively given both a weaker earnings profile, and strong loan growth over the past few years.
Excluding energy-related exposure, asset quality continues to remain relatively good. Fitch notes that non-performing assets (NPAs), inclusive of accruing troubled debt restructurings, compared favorably to large regional bank peer average at year-end. BBVAC's net charge-offs (NCOs) in 2015 were slightly better than the large regional bank peer average (excluding COF), while its crisis-era experience was roughly in line with peer averages. Fitch expects some asset quality deterioration for BBVAC, as well as the industry, from unsustainably low current levels.
During 2015, BBVAC reported deterioration in NPAs balances from the prior year, with the most deterioration in C&I NPAs due to energy-related weaknesses, though there was also some erosion consumer indirect, though within our expectations.
Offsetting these rating drivers, BBVAC's earnings performance continues to lag the average for large regional banks in the U.S. and is considered a key VR constraint by Fitch. BBVAC return on assets (ROA) in 2015 was just 55 basis points (bps), as compared to the peer average (excluding BBVAC) of approximately 100bps. However, Fitch notes that BBVAC's earnings profile is in line with other FBOs, who tend to lag large regional peers due to generally higher funding costs, greater reliance on spread income, and higher overhead costs.
Part of BBVAC's weaker earnings profile is due to its net interest margin (NIM), which is impacted by a much higher cost of interest-bearing deposits than peers. While deposit costs have been generally declining for the entire industry, the cost of interest-bearing deposits for BBVAC has been generally trending up due to deposit promotions. BBVAC has been able to grow interest-bearing deposits by 10% from a year ago. The bank has also been successful in increasing non-interest bearing balances, which now represent approximately 30% of total deposits.
BBVAC's high energy-related exposure also currently constrains ratings. BBVAC reported $4.2 billion of energy loans as of March 31, 2016 or roughly 7% of total loans and 56% of tangible common equity. This exposure is higher than all other Fitch-rated large regional bank peers.
Given BBVAC's concentration in Texas and 20 year history in energy lending, it is expected its exposure would be somewhat higher than most peers. That said, the company's energy-related exposure had a meaningful impact on earnings in the first quarter of 2016 (1Q16), in which the company reported an ROA of only 15bps. While total loan losses remain manageable to date, BBVAC reported a significant increase in provision expenses. Related loan loss reserves now total 3.7% at March 31, 2016, which is well below most peers, especially in light of the composition of its portfolio which includes 87% non-IG credits, though Fitch notes its exposure to service companies is well below peer averages. Fitch expects BBVAC may incur increased energy-related credit costs that will further impair its earnings over the near term.
Over the last several years, BBVAC has also reported very strong loan growth, well in excess of large regional bank peer averages banks and GDP, which may be vulnerable to deterioration under a slowing economy or higher interest rates. Fitch notes however that overall loan growth slowed in 2015, converging to peer averages, with the exception of auto loans. This portfolio grew 21% in 2015, well in excess of the peer median. Fitch observes that loan losses have deteriorated over the past year, with NCOs in the indirect book totaling 165bps in 1Q16 as compared to 85bps a year ago.
This level of loan growth raises concerns as to any relaxation in underwriting standards and whether the company is receiving the appropriate risk-adjusted return in an extremely competitive lending environment. Fitch will be monitoring the growth in these portfolios for any asset quality deterioration that exceeds our expectations.
Bank liquidity is considered roughly in line with peer banks, though its loan to deposit ratio is on the higher end of the peer group. BBVAC manages its liquidity separately from BBVA and does not rely on its parent for any funding. Holding company liquidity is very strong, with a significant amount of cash to cover nominal interest payments on just $100 million of trust-preferred securities. Fitch expects BBVAC will increase its capital returns to the parent in the future, though it is assumed it will be in moderate amounts, governed by U.S. regulatory stress testing.
Fitch also notes that BBVAC appears well-prepared for regulatory rules for foreign-owned banks, including the formation of an intermediate holding company on July 1, 2016. Fitch anticipates the existing holding company structure will become the new IHC. BBVAC folded its U.S.-based broker-dealer, BSI, into its organization a few years back. As such, Fitch does not impact a material impact upon the formation of IHC, and expects BBVAC should be able to comply with enhanced prudential standards by July 1st.
BBVAC also announced that the Federal Reserve Bank of Atlanta recently improved its CRA rating to Satisfactory from Needs to Improve. With its improved CRA rating, BBVAC is no longer restricted from bank M&A. However, we expect that future M&A will be focused on non-bank acquisitions, in keeping with its technology-focused strategy.
SUPPORT RATING AND SUPPORT RATING FLOOR
BBVAC's Support Rating of '2' reflects the parent's ability and propensity to support BBVAC. BBVAC's support-driven IDR has historically been one notch below BBVAC, reflecting Fitch's view that BBVAC is strategically important to BBVA, though not core. Since BBVAC's support reflects institutional support, there is no Support Rating Floor assigned.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid securities issued by BBVAC and by various issuing vehicles are all notched down from BBVAC's or its bank subsidiaries' VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles.
HOLDING COMPANY
BBVAC's IDR and VR are equalized with those of Compass Bank, 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.
LONG- AND SHORT-TERM DEPOSIT RATINGS
BBVAC's uninsured deposit ratings are rated one notch higher than the company'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.
RATING SENSITIVITIES
IDRS AND SENIOR DEBT
Since BBVAC's ratings and Outlook are correlated with those of BBVA, changes in BBVA's ratings may result in changes to BBVAC's IDRs and Outlook. Given BBVAC's VR is at 'bbb,' downward rating actions may be limited to just one notch as BBVAC's VR would become the anchor for its IDR, absent any changes to the company's VR.
VR
Over the medium to long term, Fitch envisions limited VR upgrade potential, and likely more downgrade pressure. A downgrade to the VR would arise in the event that BBVAC were to manage its capital more aggressively, though given BBVAC's recent CCAR capital requests and historical dividend practices, this is viewed as unlikely.
Further, while the company's energy-related exposure is expected to continue to pressure earnings, and not impair capital, if capital erosion occurs as a result of elevated loan losses, BBVAC's VR could be impacted. Fitch expects loan losses will deteriorate from currently unsustainably low levels, but outsized losses, particularly in the energy book, that reduce capital by more than 50bps could pressure ratings.
Further, Fitch remains concerned regarding the strong loan growth BBVAC has reported over the past several years, especially as it compares to peer averages. In general, Fitch views loan growth that significantly outpaces GDP and peer growth skeptically as it raises concerns about adverse selection, underwriting standards, and the appropriate risk-return trade-offs. Increasing loan losses, that are in excess of peer averages or historical performance, may impact BBVAC's VRs.
Conversely, over the more medium to long term, BBVAC's VR could be upgraded with improving earnings performance, combined with the continuation of generally benign asset quality and the maintenance of capital at appropriate levels.
SUPPORT RATING AND SUPPORT RATING FLOOR
In the event Fitch views BBVAC as no longer strategically important to BBVA, its support rating could be downgraded. If the support rating were downgraded, BBVAC's VR would likely become the anchor rating for IDR.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
These ratings are all primarily sensitive to any changes in the VR of BBVAC.
HOLDING COMPANY
Should BBVAC's holding company begin to exhibit signs of weakness, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of Compass Bank.
LONG- AND SHORT-TERM DEPOSIT RATINGS
The ratings of long- and short-term deposits issued by BBVAC and its subsidiaries are primarily sensitive to any change in BBVAC's long- and short-term IDRs.
Fitch has affirmed the following ratings:
BBVA Compass Bancshares, Inc.
--Long-Term IDR at 'BBB+'; Outlook Stable;
--VR at 'bbb';
--Support at '2';
--Short-Term IDR at 'F2'.
Compass Bank
--Long-Term IDR at 'BBB+'; Outlook Stable;
--Long-term deposits at 'A-';
--Senior unsecured at 'BBB+'.
--Short-Term IDR at 'F2';
--VR at 'bbb';
--Short-term deposits at 'F2';
--Support at '2';
--Subordinated debt at 'BBB-'.
TexasBanc Capital Trust I
--Preferred stock at 'BB-'.
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