Fitch Ratings has affirmed the ratings of First Niagara Financial Group, Inc. (FNFG) and its main subsidiary, First Niagara Bank at 'BBB-/F3'. In addition Fitch has assigned the holding company a Negative Rating Outlook from its previous Rating Watch Negative. For First Niagara Bank, the Rating Outlook is revised to Negative from Stable. Please see the list of ratings at the end of this release.
KEY RATING DRIVERS - IDRS, VRs AND SENIOR DEBT
First Niagara Financial Group, Inc's (FNFG) rating affirmation reflects the bank's consistent performance, proven stable asset quality, and continued capital build. The removal from Negative Watch reflects Fitch's view that FNFG's holding company has adequate liquidity, as Fitch calculates that is has 2x holding company obligations coverage, excluding dividends from the bank. At Sept. 30, 2014, FNFG's parent company had $382 million in cash to service roughly $93 million of interest and operating expenses and $112 million of annual common dividends. FNFG coverage would increase to 4x excluding the shareholder common dividend. Fitch considers the level of holding company liquidity to be ample enough to allow FNFG to improve its overall financial profile. Incorporated in Fitch's affirmation is the assumption that FNFG will continue to receive regulatory approval to upstream bank dividends to the holding company and also maintain 2x coverage on a rolling-quarter basis.
In Fitch's view, the company's core operating performance continues to be satisfactory and in-line with rating expectations. FNFG's announced fourth quarter 2014 (4Q'14) net income of $77.6 million compared to $77.7 million the same period a year ago. Excluding the one-time reversal related to deposit account remediation and restructuring charges, core earnings were roughly $$69.2 million. Total revenue, net interest income (NIM) and non-interest income, was down compared to a year ago mainly due to the decline in income accretion from prepayments of certain CLOs as well as compression on loan yields. The NIM declined to 3.11%. In Fitch's view, earnings may be pressured by the difficult economic and low interest rate environment in 2015, similar to peers.
Asset quality continues to be solid and supports current ratings. The company has historically delivered solid asset quality performance through various credit cycles and currently FNFG's net chargeoffs (NCOs) and nonperforming assets (NPAs; which includes troubled debt restructuring and acquired loans) stood at 0.23% and 1.4% for 3Q'14, which compares favorably to peers. Although, Fitch believes NCOs will increase from historical performance given commercial loan growth, it is expected to remain manageable.
Fitch also recognizes that the company continues to build capital, albeit gradually. Notably, the company's capital ratios improved compared to 2013. FNFG's Tier 1 Common, TCE and Tier 1 RBC totaled 8.21%, 6.30% and 9.81%, respectively, for 4Q'14. Nonetheless, FNFG's capital position is much lower than similarly-rated peers and most of Fitch's U.S. rated financial institutions from a tangible common equity (TCE) position and a regulatory capital standpoint. By way of comparison, Fitch's Mid-tier Regional peer group had average Fitch Core Capital/RWA (which is comparable to Tier 1 Common) of 10.71% versus FNFG's of 8.06% as of Sept. 30, 2014.
The Negative Outlook reflects the company's lower than peer capital position which has remained the case for longer than Fitch had expected and, in Fitch's view, provides little support should challenges arise. Additionally, Fitch believes FNFG's risk profile has grown and is greater than other Mid-tier Regional peers. As previously noted, FNFG's loan growth, particularly C&I, exceeded the Mid-tier Regional group average over the last few years by a wide margin. Further, the company has also entered relatively new business lines such as indirect auto, leveraged lending, and asset-based lending at a time when competition for loans is fierce. Despite continued stable core operating performance, Fitch believes the company may face some challenges at a time when financial flexibility is pressured.
RATING SENSITIVITIES - IDRS, VRs AND SENIOR DEBT
Incorporated in today's rating action is the view that the company will continue to accrete capital while maintaining appropriate provisioning. Additionally, FNFG's ratings are sensitive to maintenance of holding company debt service coverage of at least 2x coverage on a rolling basis. Further, FNFG's ratings are sensitive to Fitch's view of continued progress towards reducing its outsized CLO portfolio to be Volcker compliant, with minimal losses. Should any or all of the factors noted deviate from expectations, Fitch would review the ratings for a downgrade.
A revision to Stable Outlook would likely occur if FNFG is able to build its capital position to similarly-rated peer averages absent any negative asset quality trends and decline in profitability measures.
RATING SENSITIVITIES - HOLDING COMPANY
Should FNFG's holding company begin to exhibit signs of weakness, be denied a dividend from its bank subsidiary, or have debt service coverage below 2x, there is the potential that Fitch could notch the holding company IDR and Viability Rating (VR) further from the ratings of the operating companies.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
FNFG has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, FNFG is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support.
RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
FNFG's Support Rating and Support Rating Floor are sensitive to Fitch's assumption as to 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 FNFG and by various issuing vehicles are all notched down from FNFG 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 FNFG and its subsidiaries are primarily sensitive to any change in FNFG's VR.
KEY RATING DRIVERS - LONG- AND SHORT-TERM DEPOSIT RATINGS
FNFG'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 FNFG and its subsidiaries are primarily sensitive to any change in FNFG's long- and short-term IDRs.
Fitch has affirmed the following ratings with a Negative Outlook:
First Niagara Financial Group, Inc
--Long-term Issuer Default Rating 'BBB-';
--Short-term IDR 'F3';
--Viability rating 'bbb-';
--Senior unsecured 'BBB-';
--Preferred stock 'B';
--Subordinated debt 'BB+';
--Support '5';
--Support Floor 'NF'.
First Niagara Bank
--Long-term deposits at 'BBB';
--Long-term IDR at 'BBB-';
--Viability at 'bbb-'
--Short-term deposits at 'F3';
--Short-term IDR at 'F3'.
--Support at '5';
--Support Floor at 'NF'.
Additional information is available on www.fitchratings.com.
Applicable Criteria and Related Research:
--'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);
--'U.S. Banking Quarterly Comment: 3Q14' (Oct. 27, 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
Rating FI Subsidiaries and Holding Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397
U.S. Bank HoldCos & OpCos: Evolving Risk Profiles
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742096
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978633
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.
