Fitch Ratings has affirmed First Republic Bank (FRC) ratings at 'A-/F1'. The Rating Outlook remains Stable. The rating affirmation and Outlook reflects the company's strong franchise, superior asset quality through the cycle, and stable operating performance. These strengths are balanced against FRC's geographically and product-concentrated businesses and limited revenue diversification. FRC's Stable Outlook reflects Fitch's expectation that asset quality, capital and operating performance will not materially change over the medium term.
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
Fitch considers FRC's franchise to be a key ratings strength for the company, complemented by its stable management team which has fostered a conservative credit environment. FRC is heavily focused on relationship banking that targets an affluent customer base and uses jumbo residential mortgage products lending as a feeder to its private banking and wealth management activities. This business model has produced stable operating results and solid asset quality metrics through credit cycles.
FRC's pristine asset quality is also an important rating strength, as it consistently has the lowest nonperforming asset (NPA) levels amongst the entire mid-tier bank group. Fitch views FRC's strong asset quality as a product of its solid core management team, good underwriting practices, high net-worth clientele and strong local markets.
FRC's earnings performance is solid. The company's return on average assets (ROAA) ranks amongst the highest of the mid-tier group's earnings profiles. That said, FRC's full year return on average assets declined from 1.20% to 1.06% due to heightened regulatory cost and net interest margin compression. Fitch expects earnings to be modestly lower in 2015 due to continued regulatory costs and margin compression. Presently, FRC's earnings profile is heavily dependent on spread revenues. However, over the long term, FRC's growing wealth management business should help diversify earnings, which could be a positive for the company's overall credit profile.
Fitch recognizes FRC's solid liquidity position. The company has managed to grow deposits faster than loans in 2014. That said, FRC's loan to deposit ratio remains in the top quartile of the peer group with loans representing 103% of deposits. Fitch believes FRC's liquidity risk is significantly reduced due to FRC's strong asset quality and strong history of execution on its strategies.
Fitch views FRC's capital levels to be appropriate in the context of the company's overall risk appetite and anticipates that FRC will manage its capital ratios near current levels. Moreover, FRC is still considered a de novo bank and is thus subject to elevated capital requirements.
RATING SENSITIVITIES - IDRs, VRs AND SENIOR DEBT
A ratings upgrade is unlikely in the near term given FRC's geographic concentration to California and limited revenue diversification. Presently, FRC is largely reliant on spread income. Further growth in fee income could strengthen the franchise strength and earnings stability over the medium-to-long term. FRC's ratings would be sensitive to negative shocks to home prices in its key markets such as San Francisco, Los Angeles, and New York City. Although Fitch expects FRC's credit quality to remain relatively unchanged in the near term, the agency remains concerned about the rapidly rising home values in San Francisco, which is a core market for the company.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
FRC has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, FRC 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
FRC 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
Preferred shares issued by FRC are all notched down from FRC's 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 preferred stock issued by FRC are primarily sensitive to any change in FRC's VR.
KEY RATING DRIVERS - LONG- AND SHORT-TERM DEPOSIT RATINGS
FRC'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 FRC's and its subsidiaries are primarily sensitive to any change in FRC's long- and short-term IDRs.
First Republic Bank has $48 billion dollars in assets and is headquartered in San Francisco CA. The company serves predominantly high net-worth individuals and operates a network of 73 offices, including 68 licensed deposit-taking branches, which are primarily located in San Francisco, Palo Alto, Los Angeles, Santa Barbara, Newport Beach, San Diego, New York, Boston, Palm Beach and Portland. Approximately 65% of loans outstanding are in California and 19% are in New York.
Fitch affirmed the following ratings with a Stable Outlook:
First Republic Bank
--Long-term IDR at 'A-'; Outlook Stable
--Short-term IDR at 'F1';
--Viability Rating at 'a-';
--Long-term deposit at 'A';
--Short-Term deposits at 'F1';
--Senior Secured at 'A-'
--Preferred stock at 'BB':
--Support Floor 'NF';
--Support '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. 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);
--'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)
Applicable Criteria and Related Research:
Rating Considerations for U.S. Bank Holdco & Opcos (Update on Position Outlined in 1Q14)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821068
U.S. Bank HoldCos & OpCos: Evolving Risk Profiles
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742096
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
Risk Radar Global 3Q14
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=773568
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
U.S. Banks: Implications of an Interest Rate Shock Scenario
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=800748
2015 Outlook: U.S. Banks (Growth in a Challenging Rate Environment)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=809228
U.S. Basel III and Dodd Frank Act Regulatory Guide (Applicability of New Bank Regulations in the U.S.)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=798848
U.S. Banks: The Risks with Energy Slide
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=854268
U.S. Banking Quarterly Comment: 4Q14 (All Eyes on Oil Prices and Interest Rates)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=849388
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978970
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