Fitch Affirms BOK Financial's Ratings at 'A/F1'; Outlook Revised to Negative
At the same time, Fitch has revised the Rating Outlook for BOKF to Negative from Stable given the more challenging environment in the largely energy-driven economies of Texas and Oklahoma where BOKF principally operates.
The rating action follows a periodic review of the mid-tier regional banking group, which includes BankUnited Inc. (BKU), BOK Financial Corporation (BOK) Cathay General Bancorp (CATY), East West Bancorp, Inc. (EWBC), First Horizon National Corp. (FHN), First National of Nebraska, Inc. (FNNI), First Republic Bank (FRC), Fulton Financial Corp (FULT), Hilltop Holdings (HTH), Synovus Financial Corp. (SNV), TCF Financial Corp. (TCB), Wintrust Financial Corp (WTFC), and UMB Financial Corporation (UMB).
KEY RATING DRIVERS
IDRS, VIABILITY RATINGS AND SENIOR DEBT
Today's rating affirmation is reflective of BOKF's continued good operating performance and sound financial position relative to other institutions in Fitch's midtier regional bank peer review. BOKF's earnings performance remains near peer-group averages with the company keeping its return on average assets (ROAA) relatively steady at approximately 1.00% over the course of 2015.
This is noteworthy because BOKF's net interest margin as of fourth quarter 2015 (4Q15) of 2.64% is the lowest of the peer group, meaning the company's earnings have been driven largely by good credit performance which has necessitated minimal provisioning, a good contribution from non-interest income which approximates nearly 50% of the company's revenue, as well as satisfactory operating expense management as demonstrated by a mid-60s efficiency ratio.
In addition this performance has been supported by a good operating culture and better-than-peer-average capital ratios, both of which help to support the comparatively high ratings of BOKF relative to peer institutions in Fitch's midtier regional bank peer review. As of 4Q15, BOKF's Common Equity Tier 1 (CET1) ratio was 12.1% and its tangible common equity (TCE) ratio was 9.0%, which compares well to peers.
However, Fitch has also revised BOKF's Rating Outlook to Negative from Stable due to some potential expected credit deterioration as well as more challenging economic conditions within its core markets of Texas and Oklahoma.
Given the continuous drop in prices for oil and other energy related commodities over the last year, Fitch anticipates that operating conditions for BOKF as well as some other institutions will be more challenging as the effects of prolonged lower energy prices begin to reverberate primarily throughout more energy-dependent geographies.
Approximately 18% of BOKF's commercial loan portfolio was energy related, comprising primarily reserve-based exposures with a much smaller component of oil field services loans. This is a significantly higher proportion of energy and energy-related loans than many peer institutions, and has the potential to lead to comparatively higher overall credit deterioration for BOKF than for other peer institutions. To the extent that increased credit deterioration leads to higher provisioning and therefore earnings volatility relative to peer institutions, this could create negative ratings pressure.
To this end, BOK recently indicated that due to a loan impairment on a single borrower, the company incurred higher provision expense for 4Q15 of $22.5 million, which is significantly higher than its previously forecasted provision for credit losses of $3.5 million to $8.5 million.. While this is indicative of some negative earnings pressure, Fitch notes the company's profitability was still good yet lower in 4Q15.
Fitch does note that the potential loss content in BOKF's reserve-based energy exposures could be manageable given the senior secured nature of the loans, though as oil prices continue to decline and should they remain low for an extended period, the potential loss content of this portfolio is likely to increase. The loss content of the oil field services loan portfolio, however, is likely to be much higher, though this remains a comparatively smaller part of BOKF's overall energy exposure.
Another potential driver of the Outlook revision to Negative is the knock-on effects of reduced economic activity due to lower energy prices in BOKF's core markets of Oklahoma and Texas. Together, these two geographies represent nearly 73% of BOKF's overall loan portfolio.
At present, economic indicators in these geographies remain satisfactory, but should they begin to exhibit weaknesses it could at minimum result in middling loan growth opportunities, or, more severely, result in other commercial and commercial real estate loan losses for BOKF given its comparatively high concentration in commercial real estate (CRE) of approximately 21% of the loan portfolio. Fitch notes that potential loss content in CRE loans across the industry has historically been higher than some loss content in other loan categories.
HOLDING COMPANY
The ratings of BOKF's holding company are equalized with those of the subsidiary bank and reflect Fitch's expectation that the holding company should be able to cover its obligations for at least 12 months.
SUBSIDIARY AND AFFILIATED COMPANY
The IDRs and VRs of the subsidiaries are equalized with those of BOKF to reflect support from their parent holding company.
To the extent that one of BOKF's subsidiary or affiliated companies is not considered to be a core business, Fitch could also notch the subsidiary's rating from BOKF's IDR.
SUPPORT RATING AND SUPPORT RATING FLOOR
BOKF has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, BOKF is not systemically important and, therefore, the probability of support is unlikely. The company's IDRs and VRs do not incorporate any support.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by BOKF are all notched down from the holding company or its bank subsidiaries' VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss-severity risk profiles.
BOKF's main bank subsidiary, BOKF, NA, subordinated debt issuance ratings are notched down one notch from the company's VR.
DEPOSIT RATINGS
Deposit ratings are one notch higher than senior debt ratings reflecting the deposits' superior recovery prospects in case of default given depositor preference in the U.S.
RATING SENSITIVITIES
IDRS, VR AND SENIOR DEBT
Fitch considers BOKF's ratings to be strong and at the high end of its mid-tier regional bank peer group's ratings.
As indicated by the revision of the Outlook to Negative, potential risks to the rating include deterioration in credit performance from either BOKF's energy loan portfolio amid lower oil and other energy-related commodity prices or general slowing of economic activity in BOKF's core markets, which Fitch believes to be highly correlated to energy markets.
To the extent that the decline in credit performance causes higher provisioning such that earnings performance becomes more volatile over the Outlook horizon (12-24 months), ratings could be downgraded by one notch. A key trigger for a potential rating action would be a 25% change in the standard deviation of earnings measured over multiple quarters.
More significant rating pressure could result should the company experience consecutive or multiple quarters of overall net losses due to credit deterioration such that the losses impact the company's capital position.
At this stage Fitch views this as unlikely because even with the previously noted higher provisioning in 4Q15 BOFK still had good net income million for the quarter, which is in part supported by the company's good contribution from non-interest income. In order for more significant negative rating action to result, losses would have to exceed $60 million over multiple quarters, which at this point Fitch considers to be a low-probability outcome.
Alternatively, the Rating Outlook could be revised back to Stable should BOFK be able to manage the impact of potential credit deterioration with minimal earnings volatility (i.e. less than 25% change in the standard deviation of earnings) over multiple quarters all while maintaining above-peer-average capital ratios.
HOLDING COMPANY
Should BOKF'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 entity. This is viewed as unlikely for BOKF.
SUBSIDIARY AND AFFILIATED COMPANY
All U.S. bank subsidiaries carry a common VR, regardless of size, as U.S. banks are cross-guaranteed under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). Thus subsidiary ratings would be sensitive to any change in BOKF's VR.
SUPPORT RATING AND SUPPORT RATING FLOOR
BOKF's Support Rating and Support Rating Floor re '5' and 'NF', respectively, and therefore there is limited likelihood that these ratings will change in the foreseeable future.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
As noted, BOKF's subordinated debt and other hybrid ratings are primarily sensitive to any change in BOKF's VR or a change in Fitch's criteria for notching subordinated debt or hybrid securities.
DEPOSIT RATINGS
BOKF's deposit ratings are sensitive to any change in the IDRs, which are sensitive to any change in the VR. Thus, deposit ratings are ultimately sensitive to any change in the VR.
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Fitch has affirmed the following ratings and the Rating Outlook has been revised to Negative from Stable:
BOK Financial Corporation
--Long-term IDR at 'A'; Outlook Negative from Stable;
--Short-term IDR at 'F1';
--Viability Rating at 'a';
--Support Floor at 'NF';
--Support at '5'.
BOKF, N.A.
--Long-term IDR at 'A'; Outlook Negative from Stable;
--Subordinated debt at 'A-';
--Long-term deposit at 'A+'
--Short-term IDR at 'F1';
--Short-term deposit at 'F1';
--Viability Rating at 'a';
--Support Floor at 'NF';
--Support at '5'.
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