Fitch Ratings has affirmed Cathay General Bancorp's ratings at 'BB+/B'. The Rating Outlook remains Stable. The affirmation and Stable Outlook reflect improving asset quality and improving earnings.
The rating action follows a periodic review of the mid-tier regional banking group, which includes BOK Financial Corp. (BOKF), Cathay General Bancorp (CATY), East West Bancorp, Inc. (EWBC), First Horizon National Corp. (FHN), First National of Nebraska, Inc. (FNNI), First Republic Bank (FRC), Fulton Financial Corp (FULT), People's United Financial Inc. (PBCT), Synovus Financial Corp. (SNV), TCF Financial Corp. (TCB), Webster Financial Corp. (WBS), Wintrust Financial Corp (WTFC), and UMB Financial Corporation (UMB).
Company-specific rating rationales for the other banks are published separately.
KEY RATING DRIVERS - IDRS, VRs AND SENIOR DEBT
CATY's 'BB+' IDR is reflective of the company's solid franchise catering to Chinese-Americans, good earnings and continued asset quality improvement. CATY is headquartered in Los Angeles, CA and is the second-largest bank in the U.S. that predominantly serves the Chinese-American community. These strengths are balanced against the company's relatively weaker liquidity profile, undiversified revenue base and the company's elevated credit costs through the cycle.
Fitch views CATY's recent acquisition of Asia Bancshares as mildly positive for the company. Although the acquisition is not transformative in nature, it helps consolidate a niche banking sector, which Fitch has believed is in need of consolidation (please see 'U.S. Ethnic Affinity Banks: Asian-American Banks' at 'www.fitchratings.com' for more information). CATY's acquisition of Asia Bancshares will increase its NY presence from nine branches to 12 and will also give CATY a presence in Maryland.
CATY's earnings rank near the top of the mid-tier regional bank peer group and is a primary ratings strength for the company. CATY's earnings strength is achieved primarily through lower overhead expenses compared to peers due to its much smaller branch network. CATY has also benefited from negative provisions in 2014, and Fitch believes CATY can further reduce reserves as a percentage of gross loans going forward because reserve coverage is remains elevated at 1.81%. Additionally, Fitch expects modest near-term earnings improvement as $150 million of CATY's higher high-cost, legacy repurchase agreements expire at the end of 2014 and the beginning of 2015. That said, Fitch anticipates that CATY will be able to adequately replace the term-repurchase agreements with other sources of funding.
Asset quality continues to improve with NPAs declining and credit costs at low levels. Fitch expects continued reduction of NPAs, while credit costs remain low in the near term. Reserve levels are strong, especially given recent loss history. Fitch also views CATY's risk appetite as improved since the great recession. Although CATY has experienced strong commercial growth, the company has maintained modest exposure to construction loans, which was a primary source of losses through the cycle.
Capital levels are strong. CATY has the second highest tangible common equity ratio of the group. Given the elevated levels of capital, Fitch expects capital to be optimized in the future. Fitch does not anticipate any rating changes should capital be reduced to levels in line with its peers.
Liquidity is a ratings weakness for CATY. CATY's deposit base is more price sensitive compared to peer banks and the company is typically more reliant on wholesale funding compared to peers. Because of CATY's more price sensitive deposit base, Fitch believes CATY has less upside in a rising rate environment over the medium to longer term.
RATING SENSITIVITIES - IDRS, VRs AND SENIOR DEBT
CATY's ratings could be upgraded should the company maintain solid earnings and continue to improve asset quality metrics while not materially increasing risk appetite through growth or other new activities. Conversely, CATY's ratings could be negatively affected should Fitch view C&I growth to be unsustainable or indicative of aggressive lending practices. Fitch expects that CATY will make necessary investments required to comply with various new regulatory rules and requirements. CATY's ratings are sensitive to the extent any such investments diminish the company's financial profile.
RATING SENSITIVITIES - HOLDING COMPANY
Should CATY's holding company 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. This is viewed as unlikely though for CATY's given the strength of the holding company liquidity profile.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
CATY has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, CATY is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support.
RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
CATY's Support Rating and Support Rating Floor are sensitive to Fitch's assumption around capacity to procure extraordinary support in case of need.
KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by CATY and by various issuing vehicles are all notched down from CATY or its bank subsidiaries' VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles.
RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings of subordinated debt and other hybrid capital issued by CATY and its subsidiaries are primarily sensitive to any change in CATY's VR.
KEY RATING DRIVERS - LONG- AND SHORT-TERM DEPOSIT RATINGS
CATY'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.
KEY RATING SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS
The ratings of long- and short-term deposits issued by CATY and its subsidiaries are primarily sensitive to any change in CATY's long- and short-term IDRs.
CATY is a $11.5 billion bank holding company headquartered in Los Angeles. The company has a solid presence in the niche Asian American demographics. Its primary operations are located in California; however, the company has branches in New York, Texas, Massachusetts, Washington, Illinois, New Jersey and Hong Kong.
Fitch has affirmed the following ratings with a Stable Outlook:
Cathay General Bancorp
--Long-term at 'BB+';
--Short-term IDR at 'B';
--Viability Rating at 'bb+';
--Preferred stock at 'B-';
--Support Floor at 'NF'
--Support affirmed at '5'.
Cathay Bank
--Long-term IDR at 'BB+';
--Long-term deposit at 'BBB-';
--Short-term IDR at 'B'
--Short-term deposit at 'F3';
--Viability Rating at 'bb+';
--Support Floor at 'NF';
--Support at '5'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Banking Quarterly comment: 4Q14' (Jan. 28, 2015)
--'U.S. Banks: The Risks with Energy Slide' (Jan. 16, 2015)
--'U.S. Basel III and Dodd Frank Act Regulatory Guide' (Nov. 21, 2014)
--'2015 Outlook: U.S. Banks (Growth in a Challenging Rate Environment)' (Nov. 12, 2014);
--'U.S. Banks: Implications of an Interest Rate Shock Scenario' (Oct. 30, 2014);
--'U.S. Banks: Liquidity and Deposit Funding' (Aug. 8, 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);
--'Fitch Fundaments Index 4Q14 (Fitch Fundamentals Index Remains Neutral)' (Jan. 15, 2015);
--'Risk Radar Global 3Q14' (Sept. 15, 2014);
--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);
--'Assessing and Rating Bank Subordinated and Hybrid Securities Criteria' (Jan. 31, 2014);
--'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles' (March 27, 2014);
--'Rating Considerations for U.S. Bank Holdco & Opcos' (Update on Position Outlined in 1Q14) (Dec. 1, 2014);
--'U.S. Ethnic Affinity Banks: Asian-American Banks' (Oct. 26, 2014).
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978967
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