Fitch Affirms East West Bancorp at 'BBB' Following Midtier Regional Bank Review; Outlook Stable
The rating action follows a periodic review of the midtier regional banking group, which includes BankUnited Inc. (BKU), BOK Financial Corp. (BOKF), Cathay General Bancorp (CATY), East West Bancorp (EWBC), First Republic Bank (FRC), First Horizon National Corp. (FHN), First National of Nebraska Inc. (FNNI), Fulton Financial Corp. (FULT), Hilltop Holdings, Inc. (HTH), Synovus Financial Corp. (SNV), TCF Financial Corp. (TCB), Trustmark Corp. (TRMK), UMB Financial Corp. (UMBF) and Wintrust Financial Corp. (WTFC).
Company-specific rating rationales for the other banks are published separately, and for further discussion of the midtier regional bank sector in general, refer to the special report titled 'U.S. Banks: Midtier Regional Bank Periodic Review,' to be published shortly.
KEY RATING DRIVERS
IDRs and VRs
EWBC's solid earning profile is a primary ratings driver. The company's recent earnings continue to benefit from modest overhead expenses, good spread income, and low credit costs. EWBC has historically reported stronger earnings than peers, even during the financial crisis years (excluding 2008), albeit with a high reliance on spread income. Further, EWBC notes over the past ten quarters, EWBC has reported both stronger earnings than almost all of the peers, but also with less volatility over this time period.
Based on company-reported interest rate risk simulation results, EWBC also appears the best positioned for a rising rate interest rate scenario with projected net interest income to increase the most of the mid-tier peer group. While interest rate risk simulation results are highly dependent on modeling assumptions, especially deposit betas, which are not widely disclosed and may behave very differently than in the past, the make-up of EWBC's asset profile suggests the company stands to reap ample benefits if rates increase in 2016. At September 30, 2015, approximately 86% of the company's loan portfolio had maturities or repricing terms of less than one year. Further, even assuming $2bn of demand deposits (or around 25% of noninterest-bearing demand deposits) migrate into higher interest-bearing deposits, EWBC forecasts that net interest income would still increase a healthy 5.7% under an instantaneous 100bps increase in interest rates. However, Fitch expects future interest rates increases will likely be gradual in nature. As such, much of the earnings improvement forecast by modeling may not be realized over the near term.
EWBC's asset quality has improved since the height of the financial crisis, in line with peers and industry trends, as well as Fitch's expectations. EWBC loss experience during the credit crisis was worse than many of its peers. More recently, NPA balances have remained well below peak levels, though there was a notable increase in nonaccrual balances in 3Q15. EWBC attributed the increase in nonaccrual balances to three commercial loans in which payments are current, but they were placed on nonaccrual as of Sept. 30, 2015 due to future cash flow concerns. Even with these new nonaccrual loans, NPAs remain very low relative to mid-tier peer banks. Excluding the PCI-loans, EWBC's ratio of NPAs (inclusive of accruing TDRs) to loans and foreclosed real estate falls to the second lowest of the peer group.
EWBC's capital is considered adequate, with an estimated CET1 under Basel III at 10.8% at Sept. 30, 2015, just slightly below the peer median. Other capital ratios are fairly stable over the past twelve months, which Fitch views as prudent, especially given strong loan growth over the past several years.
Fitch observes continued strong loan growth trends in C&I and CRE balances at EWBC, which have far outpaced industry and peer averages over the past several years. In Fitch's view, this may suggest that EWBC may be increasing its risk appetite, or easing credit standards. However, C&I loan growth has slowed over the past 12 months, as compared to the prior year period, and the company has a much more balanced loan mix now then pre-crisis. At Sept. 30, 2015, C&I and CRE the two largest categories at 38% and 34%, respectively, each of total loans. Conversely, at year-end 2007, nearly 60% of loans were to non-owner-occupied CRE borrowers. Since that time, EWBC has shrunk that portfolio, while simultaneously growing some consumer loan types, namely residential mortgages and home equity.
EWBC's funding profile is distinctive in its ability to attract Chinese-American depositors, albeit at costs slightly higher than the mid-tier median. EWBC's loan-to-deposit ratio has declined over the past year with deposit growth of roughly $3 billion outpacing $1.6 billion of loan growth. A good portion of the deposit growth came from noninterest bearing-deposits, which now account for 31% of total deposits. EWBC is unique in that it is the only bank of its size to have a notable presence in China, and the only Asian-American focused bank with full service banking offices in the U.S. and China.
In terms of the company's risk controls, Fitch notes there have been recent weaknesses identified. In November 2015, EWBC entered into a Written Agreement with the Federal Reserve Bank of San Francisco due to certain deficiencies in its Bank Secrecy Act and Office of Foreign Assets Control compliance program. Fitch views this written agreement and the associated costs as somewhat emblematic of banks that grow rapidly, in which their existing infrastructure may not keep pace with their growth in balance sheet or operations. Related to the regulatory action, acquisition and de novo branches will be curtailed over the next couple years, which Fitch views as prudent given the strong balance sheet growth. Fitch expects EWBC to fully remediate these issues over the near to intermediate-term.
HYBRID SECURITIES
Hybrid capital issued by EWBC and its subsidiaries are all notched down from the VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles.
Legacy Tier 1 securities are generally rated four notches below the VR, made up of two notches for high loss severity relative to average recoveries, and two further notches for non-performance risk, reflecting the fact that coupon omission is not fully discretionary.
LONG- AND SHORT-TERM DEPOSIT RATINGS
Deposit ratings are one notch higher than the IDR reflecting the deposits' superior recovery prospects in case of default given depositor preference in the U.S.
HOLDING COMPANY
EWBC's IDR and VR are equalized with those East West 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. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities.
SUPPORT RATING AND SUPPORT RATING FLOOR
EWBC has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, EWBC is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support.
RATING SENSITIVITIES
VR and IDRs
Positive rating momentum is limited in the near term given the bank's recent growth and capital levels. Moreover, if loan growth does not moderate or asset quality begins to show signs of deterioration, particularly in newly originated commercial loans, negative credit action could occur. Failure to fully address the regulatory agreement could also lead to downward ratings momentum. Fitch views there to be more negative rating pressure currently than upside potential.
EWBC's ratings are also highly sensitive to its capital levels. Negative rating action could result if capital is managed down further, especially given the company's outsized loan growth.
Superior credit performance of recently originated C&I and CRE loans during the next asset quality downturn could provide support for ratings momentum, at the same time of a superior earnings profile.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings for EWBC and its operating companies' subordinated debt and preferred stock are sensitive to any change to EWBC's VR.
The securities' ratings are also sensitive to a change in their notching, which could arise if Fitch changes its assessment of the probability of their non-performance relative to the risk captured in the issuers' VRs. This may reflect a change in capital management in the group or an unexpected shift in regulatory buffer requirements, for example.
LONG- AND SHORT-TERM DEPOSIT RATINGS
The long-and short-term deposit ratings are sensitive to any change to EWBC's long-and short-term IDR.
HOLDING COMPANY
Should EWBC's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, 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 the operating companies.
SUPPORT RATING AND SUPPORT RATING FLOOR
Since EWBC's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future.
Fitch has affirmed the following ratings:
East West Bancorp, Inc.
--Long-term IDR at 'BBB'; Outlook Stable;
--Short-term IDR at 'F2';
--Viability Rating at 'bbb';
--Support at '5';
--Support Floor at 'NF'.
East West Bank
--Long-term IDR at 'BBB'; Outlook Stable;
--Long-term deposits at 'BBB+';
--Short-term IDR at 'F2';
--Short-term deposits at 'F2';
--Viability Rating at 'bbb';
--Support at '5';
--Support Floor at 'NF'.
East West Capital Statutory Trust III, East West Capital Trust IV, V, VI, VII, VIII & IX
--Trust preferred securities at 'BB-'.
Комментарии