News Column

Fitch Upgrades Associated to 'BBB'/'F2' following Mid-Tier Regional Peer Review; Outlook Stable

February 5, 2014

NEW YORK --(BUSINESS WIRE)-- Fitch Ratings has upgraded Associated Banc-Corp.'s (ASBC) ratings to 'BBB'/'F2' from 'BBB-'/'F3'. The Rating Outlook was revised to Stable from Positive. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS - IDRS, VRs, AND SENIOR DEBT Today's upgrade reflects Fitch's view that management has taken meaningful steps over recent periods to de-risk the bank's balance sheet and has positioned the bank to generate reasonable returns relative to its risk profile going forward. The Stable Outlook reflects Fitch's view that the company's ratings are fairly constrained at 'BBB' given its relatively weaker core earnings power when compared to higher rated peers as well as the expectation that capital will continue to be managed at levels comparable with similarly rated peers. Fitch observes that at 4Q'13 ASBC had non-performing assets (NPAs) of 2.1%, below the mid-tier regional peer group average and well below other 'BBB-' rated banks. Management has reduced the dollar volume of NPAs by 20% over the last year, all while keeping net charge-offs (NCOs) below 35bps on average each quarter. Asset quality improvement has coincided with the maintenance of strong capital levels, even with the bank increasing its quarterly dividend and level of share buybacks. ASBC had Basel III T1C of around 11% at 4Q'13, much higher than regulatory minimums. Management has indicated that it will manage the level down to between 8% and 9.5% through additional share buybacks, organic loan growth and/or an acquisition. Fitch's expectation that the company will manage capital appropriately and at levels commensurate with growth is reflected in today's rating action as well as the Outlook Stable. Ratings are constrained to their current level over the long term given Fitch's expectations that core earnings power will continue to be tepid in the current low-rate, low-growth environment. Associated's pre-provision net review to average assets (PPNR/AA) has averaged under 1.2% over the last five quarters, primarily challenged by a compressing net interest margin (NIM; down 15bps year over year to 3.13%) and higher overhead costs related to updating technology and branches. While the company has been taking steps to cut overhead, mainly by consolidating branches, its efficiency ratio has remained elevated in the high 60%'s, considerably higher than similarly rated peers. Bottom line results have been aided by reserve releases which were nearly 10% of pre-tax income during 2013. Fitch believes support from asset quality improvement will dwindle and ASBC's return on assets (ROA) will fluctuate between 70-75bps from quarter to quarter going forward. Fitch expects that the company will gain reasonable efficiencies in future quarters that could add to the bottom line. This expectation is reflected in the bank's 'BBB' rating and Stable Outlook. RATING SENSITIVITIES - IDRS, VRs, AND SENIOR DEBT As indicate above, Fitch expects ASBC's ratings to be constrained at their current level and sees little upward rating movement over the long term. ASBC has reported moderate growth in oil and gas (O&G) and power and utility (P&U) lending. Given growth in this sector and ASBC's upper Midwestern footprint, the company's ratings remain sensitive to credit quality in the portfolio. C&I lending, in general, has become an increasingly competitive asset class. Deterioration in the underlying asset quality of the O&G and/or P&U books would likely pressure ASBC's Rating Outlook. Moreover, excessive growth in this portfolio relative to the overall portfolio and capital could have an adverse impact on the company's rating over time. Fitch will monitor the pace at which ASBC's capital is managed down and could take negative rating action or revise the bank's Outlook to Negative should management take actions outside of what it has publicly stated that result in capital levels below their targets. ASBC has also indicated that it is interested in doing a reasonably sized acquisition in the near- to intermediate-term. Fitch would likely review ASBC's ratings in conjunction with such a transaction to assess its potential impact on the bank's capital levels post-merger, the potential costs (and cost savings), as well as the new management team of the combined entity. KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by ASBC and its subsidiaries are all notched down from ASBC's Viability Rating (VR) of 'bbb' in accordance with Fitch's assessment of each instrument's respective non-performance and relative Loss Severity risk profiles, which vary considerably. RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES ASBC's subordinated debt and other hybrid capital ratings are is sensitive to changes in ASBC's VR . Rating sensitivities for the VR are listed above. SUBSIDIARY AND AFFILIATED COMPANY KEY RATING DRIVERS Associated Bank, NA is a wholly owned subsidiary of ASBC. Associated Bank, NA's ratings are aligned with ASBC reflecting Fitch's view that the bank subsidiary is core to the franchise. SUBSIDIARY AND AFFILIATED COMPANY RATING SENSITIVITIES Associated Bank, NA's ratings are sensitive to changes to ASBC's VR or any changes to Fitch's view of structural subordination between a bank subsidiary and holding company. Rating sensitivities for the VR are listed above. KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR ASBC's Support Rating and Support Rating Floor of '5' and 'NF' reflect Fitch's view that the company is unlikely to procure extraordinary support should such support be needed. KEY RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR ASBC's Support Rating and Support Rating Floor are sensitive to Fitch's assumption of ability to procure extraordinary support in case of need. Fitch reviewed ASBC's ratings as part of the mid-tier regional bank review. The 19 banks in today's review include: Associated Banc-Corp (ASBC), BOK Financial Corp (BOKF), Cathay General Bancorp (CATY), City National Bancorp (CYN),Cullen/Frost Bankers, Inc (CFR), East West Bancorp, Inc. (EWBC), First Horizon National Corp (FHN), First National of Nebraska, Inc. (FNNI), First Niagara Financial Group, Inc. (FNFG), First Republic Bank (FRC), First Merit (FMER), Fulton Financial Corp (FULT), Hancock Holding Company (HBHC), People's United Financial, Inc. (PBCT), Synovus Financial Corp (SNV), TCF Financial Corp (TCB), UMB Financial Corporation (UMB), Webster Financial Corp (WBS), Wintrust (WTFC). Fitch has upgraded the following ratings with a Stable Outlook: Associated Banc-Corp. --Long-term Issuer Default Rating (IDR) to 'BBB' from 'BBB-'; --Senior unsecured debt to 'BBB' from 'BBB-'; --Viability rating to 'bbb' from 'bbb-'; --Subordinated debt to 'BBB-' from 'BB+'; --Preferred stock to 'B+' from 'B'; --Short-term IDR to 'F2' from 'F3'; --Commercial paper to 'F2' from 'F3'. Associated Bank, NA --Long-term IDR to 'BBB' from 'BBB-'; --Viability rating to 'bbb' from 'bbb-'; --Long-term deposits to 'BBB+' from 'BBB'; --Long-term senior debt to 'BBB' from 'BBB-'; --Short-term IDR to 'F2' from 'F3'. Associated Trust Company, NA --Long-term IDR to 'BBB' from 'BBB-'; --Viability to 'bbb' from 'bbb-'; --Short-term IDR to 'F2' from 'F3'. Fitch has affirmed the following ratings: Associated Banc-Corp. --Support at '5'; --Support floor at 'NF'. Associated Bank, NA --Support at '5'; --Support floor at 'NF'; --Short-term deposits at 'F2'. Associated Trust Company, NA --Support at '5'; --Support floor at 'NF'. Additional information is available at ' www.fitchratings.com '. Applicable Criteria and Related Research : --2014 Outlook: U.S. Banks ( Nov 21, 2013 ) --U.S. Banks: Liquidity and Deposit Funding ( Aug. 08, 2013 ) --U.S. Banks: Interest Rate Risks (What Happens When Rates Rise) ( June 18, 2013 ) --U.S. Bank Mergers and Acquisitions - When Will The Catalysts Kick In? ( July 11, 2013 ) --Global Trading and Universal Banks - Periodic Review ( Dec. 12, 2013 ) --Fitch Fundamentals Index - U.S.; Index Trend Analysis 4Q13 ( Jan. 15, 2014 ) --Risk Radar Global - Q313 ( Sept. 05, 2013 ) --Fitch Global Corporate Rating Activity -- Third Quarter 2013 ( Dec. 5, 2013 ) --U.S. Banking Quarterly Comment: 4Q13 (Earnings Continue to Tick Up, but Challenges Remain) ( Jan. 27, 2014 ) --Global Financial Institutions Rating Criteria ( Jan 31, 2014 ) --Assessing and Rating Bank Subordinated and Hybrid Securities ( Jan. 31, 2014 ) Applicable Criteria and Related Research : Assessing and Rating Bank Subordinated and Hybrid Securities Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137 Global Financial Institutions Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397 U.S. Banking Quarterly Comment: 4Q13 (Earnings Continue to Tick Up, but Challenges Remain) http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732295 Fitch Global Corporate Rating Activity -- Third-Quarter 2013 http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720480 Risk Radar Global - Q313 http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=717023 Global Trading and Universal Banks - Periodic Review http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726150 U.S. Bank Mergers and Acquisitions -- When Will The Catalysts Kick In? http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=712539 U.S. Banks: Interest Rate Risks (What Happens When Rates Rise) http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710875 U.S. Banks: Liquidity and Deposit Funding http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714196 2014 Outlook: U.S. Banks http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723989 Fitch Fundamentals Index http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=729196 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=819707 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS . IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE ' WWW.FITCHRATINGS.COM '. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Ratings Primary Analyst Bain K. Rumohr , CFA Associate Director +1-312-368-3153 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 or Secondary Analyst Justin Fuller , CFA Director +1-312-268-2057 or Committee Chairperson Christopher Wolfe Managing Director +1-212-908-0771 or Media Relations: Brian Bertsch , New York , +1 212-908-0549 Email: brian.bertsch@fitchratings.com Source: Fitch Ratings


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