Fitch Affirms Fulton Financial's Ratings at 'BBB+/F2'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Fulton Financial Corp. (FULT) ratings at 'BBB+/F2'. The Rating Outlook remains Stable. The affirmation reflects FULT's strong asset quality, solid capital and an established franchise.
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 'US Banks: Midtier Regional Bank Periodic Review,' to be published shortly.
KEY RATING DRIVERS
IDRs, VRs and SENIOR DEBT
The rating reflects FULT's solid asset quality, lower risk appetite and established franchise. FULT's risk profile has remained largely unchanged since the previous rating action in January 2015 with modest growth in loans. Average loans grew by a mere 3.5% over the 2015 fiscal year with the loan mix remaining mostly stable.
In line with rated peers, FULT's asset quality indicators showed slight improvement over the last year, reflective of the strong credit environment and the banks established and well-performing loan underwriting track record. As of 3Q15, Fitch calculated nonperforming assets ratio, which includes accruing restructured loans, stood at 1.51% of gross loans and 11bps lower than 3Q'14. Fitch expects FULT's loan performance to be flat or slightly negative over 2016 as credit conditions normalize. Relative to rated peers, Fitch views FULTs commercial loan portfolio as well diversified across industries and loan types.
With a strong Mid-Atlantic footprint, FULT operates primarily in Pennsylvania where economic growth has been relatively subdued compared to other parts of the United States and corresponds with FULT's slower loan growth over the past year. However, as the rate environment normalizes and considering recent disruption in FULT's market as a result of the acquisition of various competitor banks by other larger banks, Fitch believes there will be an opportunity for FULT to gain market share and restore growth in the coming years. Further, given the lack of inorganic loan growth, the company has optimized capital through the distributions of earnings to shareholders
Over the last two years, FULT has been focused on addressing regulatory and compliance related enhancements. The bank continues to work with its various regulatory authorities to resolve consent orders related to the Bank Secrecy Act and anti-money laundering (BSA/AML). Over the last two fiscal years the bank has spent an estimated $22 million to strengthen its BSA compliance function. With the spending on strengthening FULT's BSA/AML program peaking in 2014 and the likelihood that those efforts are now approaching fruition, Fitch expects these costs to continue declining. With significant progress made towards addressing the BSA/AML issues, Fitch believes that management will shift focus towards loan growth opportunities in 2016.
Consistent with rated peers and the overall industry, FULT's net interest margin (NIM) has continued its compression as asset yields have suffered from the protracted low rate environment. The NIM for the first nine months of FY15 dropped 20bps to 3.22% compared to the same period a year-ago. During FY15, FULT restructured its long term debt by refinancing Trust Preferred Securities (TruP) and FHLB advances. The refinancing contributed to a modest reduction in FULT's overall cost of long term debt by 36bps Y-o-Y 3Q15.The impact of these reduced funding costs will be realized in the coming quarters. Despite various cost savings initiatives executed over the year, FULT's return on average assets (ROAA) over the first nine months of 2015 was 0.86%, 9bps lower than it reported over the same period in 2014.
Fitch expects modest improvement in FULT's NIM and earnings over the next year and believes FULT is one of the best positioned banks in the peer group for a rising rate environment. The bank reported an asset sensitive profile as at 3Q15 with around 63% of interest earning assets in floating rate loans and 31% of fixed rate loans maturing in less than one year.
Incorporated in Fitch's affirmation is the view that FULT's capital levels will remain relatively flat over the next year as the company scales back capital distributions to accommodate loan growth and maintaining current risk based capital ratios. Risk-based capital levels have dropped to the lower end of the rated peer group at 3Q15. The Common Equity Tier capital ratio was 10.3% at 3Q15 and the Tier 1 capital Ratio dropped 150bps to 10.3% at 3Q15 from 12.3% at FYE2014. The drop in capital ratios can be attributed to continued capital distributions in the form of dividends and share repurchases.
FULT's stable core deposit funding base and established franchise in the south-eastern Pennsylvania region remains a key rating strength. FULT had the leading deposit market share in the Lancaster, PA MSA with 25.7% of the market. FULT's loan-to-deposit ratio is 97%, and while it has been flat since January, it now ranks at the high end the peer group. Fitch expects this ratio to be relatively flat in the near term as both loan and deposit growth moves in tandem. At 3Q15, FULT's various bank subsidiaries had about $2.1billion in additional borrowing capacity.
SUBORDINATED DEBT
Subordinated debt and other hybrid capital issued by FULT and by various issuing vehicles are all notched down from FULT or its bank subsidiaries' VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles.
LONG- AND SHORT-TERM DEPOSIT RATINGS
FULT'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.
HOLDING COMPANY
FULT's IDR and VR are equalized with its operating bank subsidiaries, 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.
SUBSIDIARIES AND AFFILIATED COMPANIES
The IDRs and VRs of FULT's bank subsidiaries are equalized with FULT's IDR reflecting Fitch's view that they benefit from the cross-guarantee mechanism in the U.S. under FIRREA.
SUPPORT RATING AND SUPPORT RATING FLOOR
FULT has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, FULT is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support.
RATING SENSITIVITIES
VR, IDRs
While near term ratings improvement is unlikely, FULT could generate positive ratings momentum should the company improve franchise strength as demonstrated by both funding costs and profitability consistently ranking amongst the top quartile of the mid-tier banks.
Negative ratings pressure could also build should asset quality trends show a significant reversal. Downward ratings pressure could also be triggered by a material reduction in capital ratios in excess of the peer group averages and beyond Fitch's expectations.
If FULT were to pursue growth through mergers and acquisitions (M&A), Fitch expects that such activity would strengthen the company's financial position and franchise. Should this activity result in the weakening of the franchise or financial position, it could result in negative ratings action. Furthermore, outsized growth in riskier loan categories such as construction loans or C&I which would signal a shift in the bank's risk appetite could also put downward pressure on the rating.
SUBORDINATED DEBT
FULT's subordinated debt ratings are sensitive to any change to FULT's VR
.
LONG- AND SHORT-TERM DEPOSIT RATINGS
The long-and short-term deposit ratings are sensitive to any change to FULT's long- and short-term IDRs.
HOLDING COMPANY
Should FULT 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.
RATING SENSITIVITIES - SUBSIDIARY AND AFFILIATED COMPANY
As the IDRs and VRs of the subsidiaries are equalized with those of FULT to reflect support from their ultimate parent, they are sensitive to changes in the parent's propensity to provide support, which Fitch currently does not expect, or from changes in FULT's IDR's.
SUPPORT RATING AND SUPPORT RATING FLOOR
Since FULT's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future.
The rating actions are as follows:
Fitch has affirmed the following ratings with a Stable Outlook:
Fulton Financial Corporation
--Long-term IDR at 'BBB+'; Outlook Stable;
--Short-term IDR at 'F2';
--Viability Rating at 'bbb+';
--Subordinated debt at 'BBB';
--Support affirmed at '5';
--Support Floor at 'NF'.
Fulton Bank, N.A.
--Long-term IDR at 'BBB+'; Outlook Stable;
--Long-term deposits at 'A-';
--Short-term IDR at 'F2';
--Short-term deposits at 'F2';
--Viability Rating at 'bbb+';
--Support '5';
--Support Floor at 'NF'.
The Columbia Bank
--Long-term IDR at 'BBB+'; Outlook Stable;
--Long-term deposits at 'A-';
--Short-term IDR at 'F2';
--Short-term deposits at 'F2';
--Viability Rating at 'bbb+';
--Support '5';
--Support Floor at 'NF'.
Lafayette Ambassador Bank
--Long-term IDR at 'BBB+'; Outlook Stable;
--Long-term deposits at 'A-';
--Short-term IDR at 'F2';
--Short-term deposits at 'F2';
--Viability Rating at 'bbb+';
--Support '5';
--Support Floor at 'NF'.
Fulton Bank of New Jersey
--Long-term IDR at 'BBB+'; Outlook Stable;
--Long-term deposits at 'A-';
--Short-term IDR at 'F2';
--Short-term deposits at 'F2';
--Viability Rating at 'bbb+';
--Support '5';
--Support Floor at 'NF'.
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