Outlooks On Six Banks Revised To Stable From Positive On Emerging Economic Downturn; Ratings Affirmed

  • We believe the emerging economic downturn associated with the COVID-19 pandemic, as well as net interest margin pressures given recent Fed rate cuts, has significantly diminished the probability that we will raise our ratings on six U.S. and Puerto Rican banks that have had positive outlooks.
  • We are therefore revising our outlooks on BancorpSouth Bank, FirstBank Puerto Rico, Popular Inc., TCF Financial, Texas Capital Bancshares, and Western Alliance Bank to stable from positive.
  • We are affirming our ratings on these institutions, all of which are one notch or more below our 'bbb+' U.S. bank anchor (which reflects our view of economic and industry risks).
  • We will reassess our outlooks and ratings on these banks as needed as conditions evolve, after considering peers at each rating level.
NEW YORK (S&P Global Ratings) March 23, 2020--S&P Global Ratings today revised its outlooks on six U.S. and Puerto Rican banks to stable from positive: BancorpSouth Bank, FirstBank Puerto Rico, Popular Inc., TCF Financial Corp., Texas Capital Bancshares Inc., and Western Alliance Bank.
At the same time, we affirmed our issuer credit ratings on each institution and its subsidiaries, where relevant:
  • BancorpSouth Bank: 'BBB/A-2'
  • FirstBank Puerto Rico: 'BB-'
  • Popular Inc.: 'BB-/B'
  • TCF Financial Corp.: 'BBB-/A-3'
  • Texas Capital Bancshares Inc.: 'BB+'
  • Western Alliance Bank: 'BBB-'
The outlook revisions primarily reflect our view that the emerging economic downturn associated with the COVID-19 pandemic, as well as net interest margin pressures given recent Fed rate cuts, has significantly diminished the probability that we will raise our ratings on these banks.
Our ratings on these institutions are all one notch or more below our 'bbb+' U.S. bank anchor--which is the starting point for the ratings and reflects our view of economic and industry risks.
Recent actions by the Federal Reserve have increased liquidity for the banking industry. But the economic fallout and current ultra-low interest rates will likely lead to substantially lower earnings and significantly worse asset quality, particularly in industries more affected by the virus outbreak. (For more, see "The Fed's Crisis Actions Will Further Bolster Liquidity For U.S. Banks, But Earnings And Asset Quality Are Set To Worsen Substantially.")
We will reassess our outlooks and ratings on these banks as needed as conditions change, after considering peer relativities at each rating level.

BancorpSouth Bank

The outlook revision on our ratings on BancorpSouth Bank reflects our view that the heightened liklihood of an economic downturn may hurt the bank's loan credit quality, fee income, and profits. We also believe that the recent large Fed rate cuts pose a headwind to BancorpSouth's net interest margin and could weigh on the bank's net interest income, which accounts for 70% of its total net revenues.
While credit quality metrics have improved over the past several years, we expect the current economic uncertainty to cause some credit deterioration in the loan portfolio. Construction and development, a higher-risk lending activity, is 10% of BancorpSouth's loans, though the company has meaningfully diversified the geographical and lending type diversity of its loan portfolio in recent years.
We believe the company's healthy capital position, adequate on-balance-sheet liquidity, and greater geographic and product diversification than during the last downturn leave it less vulnerable to individual sectors and will help to sustain it through what will likely be volatile economic conditions over the next year.
The bank's regulatory capital ratios increased in 2019 because of good earnings results and the issuance of preferred stock and subordinated debt in the latter part of the year.
Outlook
The stable outlook on BancorpSouth indicates that the bank will maintain adequate capital levels and manage earnings pressure due to lower market interest rates and higher provision expenses. We expect nonperforming assets (NPAs) and net-charge offs (NCOs) to increase.
We could lower the ratings if loan performance deteriorates meaningfully, or if the bank adopts what we view as less conservative business or financial policies.
Although unlikely in the current economy, we could raise the ratings over the next two years if we believe the bank would increase its S&P Global Ratings risk-adjusted capital ratio sustainably above 10%, which could result from a reduction in its share buybacks, stabilization in its dividend payout ratio, or less acquisition activity.

FirstBank Puerto Rico

We revised our ratings outlook on FirstBank Puerto Rico based on our view that the heightened likelihood of an economic downturn has increased risks to asset quality. Under these circumstances, we believe that the positive effects of the Banco Santander acquisition could be muted and synergies may take somewhat longer to materialize than we had previously anticipated.
We also believe FirstBank will likely incur higher credit losses and problem loans over the next year. Overall growth in commercial and consumer loans should slow as borrowers recoil from the impact of the COVID-19 pandemic, which has led to a near halt of economic activity across vast areas of the U.S., including Puerto Rico.
We believe execution and integration risks from the impending merger with Banco Santander are manageable, but the recent market upheaval and asset quality risks could lead to delays in regulatory approvals and in executing the integration.
Nevertheless, we believe FirstBank's strong capital position, its solid market share on the island, and its good on-balance-sheet liquidity will enable it to withstand potential credit and economic stress at the current rating level.
Outlook
Our stable outlook acknowledges the potential competitive advantages for FirstBank from increased scale in its business franchise following the Banco Santander acquisition, the improvement in the combined entity's deposit funding and liquidity, and its strong capital position. On balance, we expect reduced profitability and higher credit losses in the near term reflecting ultra-low interest rates and the expected economic contraction in the U.S.
We could revise the outlook to positive, or raise the ratings in the next 12 months, if the bank accretes capital faster than we currently anticipate, such that our projected S&P Global Ratings risk-adjusted capital ratio improves and remains above 15% following the merger. We could also revise the outlook or raise our ratings if FirstBank Puerto Rico's competitive position and franchise improves considerably, as evidenced by better revenue diversification and stronger market share.
Conversely, we may revise the outlook to negative (which we view as less likely) if we see outsize deposit outflows hurt FirstBank's funding, loan performance weakens materially, or the company is unable to successfully integrate and realize expected synergies from the acquisition.

Popular Inc.

The outlook revision on our ratings on Popular Inc. indicates that we expect the net interest margin will decline and overall profitability will weaken given recent Fed rate cuts and lower market interest rates. Furthermore, we anticipate the economic conditions in Puerto Rico and the U.S. will deteriorate, which will likely hurt the company's loan performance, particularly among its commercial and consumer borrowers. In addition, we expect capital ratios to decline very substantially in the first quarter given the company's $500 million accelerated share repurchase agreement, which was announced in January, and slowly rebuild throughout the rest of this year.
Nonetheless, Popular has made substantial financial improvements in recent years and strengthened its market position in Puerto Rico, aided by the Doral Bank transaction and the acquisition of certain assets and liabilities related to Wells Fargo & Co.'s auto finance business in Puerto Rico.
Furthermore, we view funding and liquidity as solid following improvements stemming from deposit growth, reduced wholesale borrowings, and deposit inflows from government-related entities. Despite significant economic headwinds, we think Popular is better positioned than other banks based in Puerto Rico to weather additional challenges, should they arise.
Outlook
The outlook on Popular is stable, reflecting our view that the rating is unlikely to change within the next 12 months. We expect the company's net interest margins to decline in 2020 given lower market interest rates, and loan performance could weaken due to a slowdown in economic activity. We expect Popular to maintain conservative business and financial policies amid difficult operating conditions.
We could raise the ratings if the bank maintains or improves its asset quality, capital ratios, and funding and liquidity metrics. Conversely, we could lower the ratings, which we view as less likely, if loan performance deteriorates materially or if capital ratios decline substantially, potentially because of lower profitability.

TCF Financial Corp.

We revised our ratings outlook on TCF Financial Corp. because we think that TCF, like other regional banks, could face earnings and asset quality pressures in the near term because of the recent Fed rate cuts and the economic fallout from the COVID-19 pandemic. That said, we believe the company's healthy capital, good on-balance-sheet liquidity, and greater geographic and product diversification resulting from the merger, which leave it less vulnerable to individual sectors, will help to sustain it through potential industrywide deteriorating economic conditions over the next year.
Outlook
The stable outlook on TCF reflects our view that in spite of the economic challenges it could face in the near term, which could weigh on its earnings and asset quality, the company's healthy capital and good core deposit funding and on-balance-sheet liquidity will help to sustain it against growing economic headwinds. We expect its performance will remain comparable to similarly rated peers over at least the next two years. Although we believe that the full integration of the TCF and Chemical organizations could take longer than we initially anticipated, we expect that TCF will benefit from the geographic and product diversification resulting from the merger.
If, over time, the company is able to take advantage of the increased scope of its business to deepen its market share and generate solid, diversified loan growth, while maintaining good asset quality and adequate core deposit funding, we could raise the ratings. Additionally, it the company grows capital over time, such that we expect it to maintain an S&P Global Ratings risk-adjusted capital ratio above 10% on an ongoing basis, we could raise the ratings.
Alternately, if the company's exposure to riskier asset classes increases substantially, loan performance deteriorates materially, or funding weakens, we could lower the ratings.

Texas Capital Bancshares Inc.

The outlook revision on our ratings on Texas Capital Bancshares Inc. (TCBI) reflects the significantly diminished possibility that we will raise the ratings over the next two years due to the worsening U.S. and global economies. However, we continue to believe that the pending merger with Independent Bank promises greater geographical, lending, and funding diversification for the combined company. The merger is expected to close by midyear, though it is unclear whether the approval process could be extended given current market conditions.
We believe TCBI, on a stand-alone basis, as well as following the merger, could face declining asset quality in the near term given the economic fallout resulting from the COVID-19 pandemic. TCBI has relatively large exposure to commercial real estate, including construction, which is 10% of loans. But it has, over the last few years, lowered its exposure to higher-risk lending, particularly energy and leveraged lending, which were 5% and 5%, respectively, of total loans at year-end 2019. TCBI also has a relatively low exposure to other stressed sectors such as retail and restaurants.
We also expect the recent deep Fed rate cuts will lower the bank's net interest margin and earnings. TCBI has a relatively low revenue contribution from non-interest income, and instead relies mostly on interest rate spread income. In response to lower interest rates, TCBI increased its mortgage finance warehouse lending, which has seen strong growth and has lower duration and interest rate risk.
The company has maintained strong credit quality over its two-decade history, and through several downturns. The company does not have a share buyback plan or common stock dividend, and we believe its capital position will remain well above regulatory minimums for the foreseeable future.
Outlook
Our outlook on TCBI is stable based on our expectation that the company will be able to navigate increasing headwinds from low energy prices, falling interest rates, and a worsening economy at the current rating level. The company also has reduced leveraged lending and energy in the last few years, while keeping a low exposure to retail. We think the mortgage finance business contributes to revenue growth, while lowering the bank's credit and interest rate risks.
We could lower the ratings over the next two years if:
  • Merger integration issues arise, or we expect TCBI's credit quality to deteriorate substantially;
  • Energy or construction loan portfolios increase meaningfully as a proportion of total loans; or
  • The Texas economy weakens significantly.
We could raise the ratings over the next two years if the company demonstrates resilience through the currently volatile market and economic conditions and maintains relatively conservative business and financial strategies. We would also look for the merged company to maintain low credit losses and exhibit financial performance in line with higher-rated peers.

Western Alliance Bank

Our outlook revision on Western Alliance Bank (WAB) indicates the significantly diminished likelihood that we will raise the ratings given the emerging economic fallout from the COVID-19 pandemic. While credit quality metrics have improved over the past several years, we expect the evolving economic downturn will eventually lead to some credit deterioration in its loan portfolio. Additionally, like its U.S. regional bank peers, we expect WAB will face net interest income pressure, higher loans loss provisions, and reduced earnings capacity in 2020.
WAB's hotel franchise book may be particularly susceptible to deterioration. As of Dec. 31, 2019, this portfolio represented 9.1% of total loans. We expect travel and tourism to decline significantly in the short term due to the COVID-19 outbreak. As such, we expect an increase in NPAs and credit losses in this portfolio.
Furthermore, given that a majority of the loan portfolio consists of commercial exposures, we expect an increase in NPAs and NCOs in 2020 due to slower economic growth. We also expect reduced earnings capacity in 2020 with lower market interest rates constraining net interest income, which has been approximately 95% of operating revenue the past several years.
Outlook
The stable outlook on WAB reflects our expectation that the bank will maintain adequate capital levels and solid liquidity and funding metrics despite challenges it could face over the next two years due to the emerging economic downturn. We expect the commercial loan portfolio's credit quality metrics to weaken, particularly the hotel franchise book. In addition, WAB will face earnings pressure due to ultra-low interest rates and higher provision expenses.
We continue to view the bank's large commercial loan portfolio and exposure to hotels cautiously from a credit perspective. We could revise the outlook to negative or lower the ratings within the next two years if the bank's loan credit quality decreases more than expected, or if the bank's capital ratios decline significantly.

We could raise the ratings if the bank maintains strong loan performance and demonstrates resilience through the currently volatile market and economic conditions, or if we project WAB's S&P Global Ratings risk-adjusted capital ratio will rise and remain above 10%.
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