IBERIABANK Outlook Revised To Negative, First Horizon National Corp. Ratings Removed From CreditWatch Positive

  • We believe the emerging economic downturn associated with the COVID-19 pandemic will affect the performance of regional banks across the country.
  • We are removing our ratings on First Horizon National Corp. from CreditWatch, where we placed them with positive implications on Nov. 6, 2019, following its announcement it would merge with IBERIABANK Corp., and affirming our ratings. Our outlook is stable.
  • At the same time, we are revising our outlook on our ratings on IBERIBANK to negative from stable.
  • We believe that the current operating environment, depending on the length and breadth of this downturn, could negatively affect the asset quality and profitability of both banks on a stand-alone basis and as a combined entity, more than we had previously anticipated. Moreover, the initial integration and operational challenges posed by the merger could increase, while the benefits of better diversification and synergies could take longer to achieve.
NEW YORK (S&P Global Ratings) March 24, 2020-- S&P Global Ratings said today it affirmed its unsolicited 'BBB-' ratings on First Horizon National Corp. (FHN) and removed them from CreditWatch, where they were placed with positive implications on Nov. 6, 2019. The outlook on the ratings is stable. At the same time, we revised the outlook on IBERIABANK Corp. and IBERIABANK to negative from stable and affirmed our 'BBB' and 'BBB+', respectively, long-term issuer credit ratings on the entities.
The removal of FHN's ratings from CreditWatch and our affirmation of these ratings with a stable outlook, reflects our view that the synergies of scale and efficiency that we expected from the merger will likely be muted (given the potential earnings and credit quality pressures)and may take longer to accrue. The outlook revision of our ratings on IBERIABANK reflects our expectation that on the close of the merger, we will rate IBERIABANK at the same level as FHN, which will be the surviving entity.
We believe the new entity could face initial integration, cultural, and operational challenges following the merger, particularly given the limited overlap in its geographic footprint. Moreover, we believe that the economic downturn stemming from the COVID-19 pandemic could exacerbate these issues. Like most regional banks, we believe FHN and IBERIABANK will likely face earnings and asset quality pressures arising from the downturn and the recent steep decline in interest rates both before and after the merger.
Over the longer term, we believe this merger of equals will result in a combined organization with more scale to increase penetration within existing markets and expand into adjacent markets, enhancing earnings power and operating efficiency (if the initial cost savings estimates are executed well). We expect it will also provide broader and more balanced geographic, revenue, and product diversification. However, given our near-term expectations for the economy, we believe the benefits of these positive credit factors could be muted and will take longer to accrete than we initially anticipated.
The company expects the merger to close in second-quarter 2020. Following the merger, the resulting entity, which will be named First Horizon and based in Memphis, will have approximately $75 billion in assets, $55 billion in loans, and $57 billion in deposits and operate 484 branches across 11 states.
Our negative outlook on IBERIABANK reflects our view that, notwithstanding the longer-term benefits of its pending merger with FHN, in the current environment the initial integration and operational challenges posed by such a transformational merger could be heightened and prolonged. Moreover, we expect, like most regional banks, IBERIABANK (on its own and as part of FHN following the merger) will face earnings and asset quality pressures given the recent Fed rate cuts and the likely ongoing economic fallout resulting from the COVID-19 pandemic. We expect that on the close of the merger, we will rate IBERIABANK at the same level as our rating on FHN. If, however, the merger with FHN does not close (which we do not expect) and IBERIABANK maintains its current strong capital position, with a risk-adjusted capital ratio above 10%, and generates earnings and asset quality measures in line with peers while maintaining adequate core deposit funding, we could revise the outlook to stable. Alternately, if the company's loan performance deteriorates materially or capital declines such that we expect its risk-adjusted capital ratio to fall below 10% on an ongoing basis, we could lower the ratings.
Our stable outlook on FHN reflects our view that at the current rating level the bank will able to manage the ongoing market turbulence and reduced earnings potential with adequate capitalization and sufficient liquidity (on balance sheet and contingent). We believe, over the long term, FHN's business franchise will benefit from the improved business scale and geographic diversity it can achieve from this merger.
We would revise the outlook to positive or raise our rating over the next two years if the merger is completed and integrated successfully and FHN (as the combined entity) is able to achieve the targeted scale, revenue diversification, and cost savings while weathering the current economic downturn with stable capitalization and steady funding metrics.
We would revise the outlook to negative, which we do not anticipate, if the bank's earnings decline materially due to margin compression and credit losses increase substantially, such that the projected S&P Global Ratings risk-adjusted capital ratio (on a stand-alone basis or combined) declines below 7%.
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