Fitch Maintains Astoria Financial's 'BBB-/F3' IDRs on Rating Watch Positive
OREANDA-NEWS. Fitch Ratings maintains the Rating Watch Positive on the 'BBB-/F3' Long-Term and Short-Term Issuer Default Ratings (IDRs) of Astoria Financial Group, Inc. (AF) and its principal banking subsidiary, Astoria Bank. Upon completion of AF's merger with New York Community Bancorp (NYCB; 'BBB+/F2'/Outlook Stable), which is scheduled to close 4Q16, Fitch expects to upgrade AF's ratings and align them with NYCB's ratings. The merger transaction is valued at $2 billion. A complete list of rating actions follows at the end of this release.
Fitch reviewed AF as part of its U.S. Niche Real Estate Bank Peer Review, which also includes Dime Community Bancshares, Inc., Emigrant Bancorp, Inc., and New York Community Bancorp, Inc.
While the business models of the U.S. Niche Real Estate Banks vary, these banks are generally characterized by their limited deposit franchises and geographic concentrations when compared to larger U.S. banks. Fitch views these limitations as ratings constraints across the peer group. The group is composed of banks with total assets ranging from approximately $5 billion to approximately $50 billion that lend primarily in the New York City metropolitan residential real estate market.
KEY RATING DRIVERS - IDRs, VRs, AND SENIOR DEBT
Fitch believes integration risks are low given AF's simplistic business model, the relatively good credit performance of AF's loan book, and solid knowledge of the common footprint. The financial aspects of the transaction seem reasonable. From a strategic perspective, the merger offers NYCB a good opportunity to deepen its mortgage lending business and broaden its overall diversification given AF is essentially a niche mortgage real estate lender. Although integration and execution risks exist, Fitch believes should challenges arise, they would be manageable for NYCB. AF's balance sheet is not complex, which should help the integration process. Additionally, NYCB has demonstrated a good track record of successfully completing acquisitions through the years.
The Rating Watch Positive reflects Fitch's view that NYCB's acquisition addresses AF's challenges regarding earnings pressures as well as interest rate risk. Fitch expects to resolve AF's Rating Watch upon the completion of the transaction with NYCB. Completion of the transaction is expected in 4Q16 and subject to customary closing conditions, including required regulatory approvals.
The ratings are supported by AF's good asset quality, solid underwriting, and strong capital position. Key rating constraints include AF's below-peer profitability, related interest rate risk, and relatively weaker liquidity profile compared to similarly-rated bank peers.
Fitch believes AF has good asset quality and considers it a key credit strength. As a result of a strategic portfolio shift, over one-third of the bank's loan book is now comprised of NYC multifamily real estate loans, the vast majority of which are secured by rent-controlled properties. Fitch views NYC multifamily real estate loans as relatively safe assets because favourable rent regulations generally keep building vacancies low and ultimately reduce the volatility of cash flows generated by such properties. Furthermore, AF significantly reduced its level of non-performing assets (NPAs) through a bulk sale of non-accruing residential mortgage loans in third quarter 2014 (3Q'14). The sale brought AF's total non-performing assets down almost $200 million, or from 3.77% of total loans, and real estate owned (as of 1Q'14) to 2.19% (as of 3Q'14). Fitch observes that AF's level of NPAs relative to total loans and real estate owned continues to remain low as of 4Q'15 at 2.27%. No bulk sale transactions were undertaken in 2015.
AF's ratings are also supported by solid underwriting performance. AF experienced low credit costs through the latest credit cycle with net charge-offs averaging about 31 basis points (bps) over the last 10 years, peaking at 62 bps in 2008. Fitch believes AF's underwriting standards are conservative and entail low loan-to-value ratios and good cash flow coverage.
Earnings are a rating constraint, in Fitch's view. AF is heavily reliant on spread income and is affected negatively during periods of low interest rates. Historically, AF's earnings have also been cyclical, which is incorporated into the ratings.
Fitch also views AF's liquidity profile as a rating constraint. Although AF currently has sufficient liquidity, the company is relatively more reliant on non-core funding sources such as FHLB advances and repurchase agreements. In 2015, average wholesale funding balances totalled $4.1 billion or 27% of average assets. Because AF has relatively higher reliance on wholesale funding, the company has a relatively higher loan-to-deposit ratio and higher cost of funds.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
AF has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, AF is not systemically important and therefore, the probability of support is unlikely. IDRs and Viability Ratings (VRs) do not currently incorporate any support.
KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
AF's preferred securities are rated five notches below its VR. Preferred stock is notched two times from the VR for loss severity, and three times for non-performance. Hybrid securities ratings are in accordance with Fitch's criteria and assessment of the instruments' non-performance and loss severity risk profiles.
KEY RATING DRIVERS - SUBSIDIARY AND AFFILIATED COMPANY
The IDRs and VRs of AF's bank subsidiary benefits from the cross-guarantee mechanism in the U.S. under FIRREA, and therefore the IDRs and VRs of Astoria Bank are equalized across the group.
KEY RATING DRIVERS - LONG- AND SHORT-TERM DEPOSIT RATINGS
AF'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, VRS, AND SENIOR DEBT
AF's ratings will likely be upgraded upon NYCB's completion of the merger. Should NYCB be unable or unwilling to complete the merger AF, Fitch would evaluate the reason and assess AF's ratings accordingly.
SUPPORT RATING AND SUPPORT RATING FLOOR
AF's Support Rating and Support Rating Floor are sensitive to Fitch's assumption as to capacity to procure extraordinary support in case of need.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings of subordinated debt and other hybrid capital issued by AF and its subsidiary are primarily sensitive to any change in AF's VR.
SUBSIDIARY AND AFFILIATED COMPANIES
As the IDRs and VRs of the subsidiaries are equalized with those of AF 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 AF's IDRs.
Fitch maintains the following ratings on Rating Watch Positive:
Astoria Financial Corporation
--Long-term IDR 'BBB-';
--Short-term IDR 'F3';
--Senior Debt 'BBB-';
--Preferred Stock 'B'
--Viability Rating 'bbb-';
--Support Rating '5';
--Support Rating Floor 'NF'.
Astoria Bank (Formerly Astoria Federal Savings and Loan Association)
--Long-term IDR 'BBB-';
--Short-term IDR 'F3';
--Long-term Deposits 'BBB';
--Short-term Deposits 'F2'
--Viability Rating 'bbb-';
--Support Rating '5';
--Support Rating Floor 'NF'.
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