Fitch Ratings has affirmed TCF Financial Corp.'s (TCB) ratings at 'BBB-/F3'. The Rating Outlook has been revised to Stable from Negative. A full list of rating actions is provided at the end of this rating action commentary.
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 notes that TCB's ratings remain toward the bottom of its peer group, reflecting its relatively higher risk profile across many financial metrics as well as a larger risk appetite.
Today's action primarily reflects Fitch's view that asset quality, particularly related to TCB's legacy portfolio, has stabilized with the nonperforming asset (NPA) bulk sale and that management has shown the ability and willingness to build capital in order to support balance sheet growth. Fitch's expectation that growth, particularly in auto finance, will continue to be relatively high over the coming quarters as the company continues to build out scale but will level out to a more normalized growth rate is incorporated into today's action as well.
Previously, Fitch had noted that the bank's ratio of NPAs to total loans and other real estate owned (OREO) was an outlier in the mid-tier regional peer group. While still elevated compared to higher rated banks, In the fourth quarter of 2014 (4Q'14), management executed on a $400 million NPA sale which has brought TCB's NPA levels to levels more in line with similarly rated peers.
The action has resulted in NPAs dropping to 2.90% from 6.18% at 4Q'13. Notably, the sale primarily consisted of legacy residential mortgages classified as troubled debt restructures (TDRs). Coinciding with the action, TCB took an additional $20 million provision related to the remaining residential mortgage nonperforming loans within its loan portfolio. Fitch also notes that net charge-offs (NCOs) on a whole nor did the transaction result in a net loss for the quarter as some have experienced when performing a nonperforming bulk sale.
Fitch views this action as a credit positive as it removes a substantial amount of overhang from legacy strategies and should result not only in strong credit performance going forward but also improved earnings as costs associated with working out of nonperforming credits dissipates.
That said, Fitch expects NPAs and credit costs to remain elevated in relative terms compared to higher rated institutions over the long term. TCB's will still have close to $200 million in accruing TDRs, with most of them consumer-related which tend to be much stickier than commercial-related TDRs. Fitch expects TCB to maintain a reserve against the remaining accruing TDRs in line with past practices at around 20% of unpaid balances, a level Fitch believes is reasonable when considering marks taken on the announced bulk loan sale and those announced around the banking industry. These expectations are incorporated in the current rating of 'BBB-' and today's affirmation.
As expected by Fitch, TCB continues to put focus on growth in its national lending loan portfolio. Growth has been particularly aggressive in the indirect auto space. Auto loans on balance sheet have grown 55% year-over-year to $2 billion. This growth rate in auto has outpaced nearly all competitors that lend in the indirect auto space and the portfolio now makes up 12% of TCB's loan book versus 8% a year prior. While losses relating to TCB's auto book have been in line with industry standards over recent periods, in Fitch's view, the portfolio still has yet to fully season or go through a full credit cycle. Furthermore, Fitch notes that growth in the portfolio is likely depressing loss ratios from quarter to quarter.
Mitigating some of Fitch's loan growth concerns is company's ability to generate and maintain a reasonable level of capital. TCB has not raised its dividend nor has it performed any material share repurchases like some banks have. Instead, management has chosen to use capital generation as a way to support growth. Therefore, the company's Total tier 1 Risk Based capital ratio has increased 35 basis points (bps) to 11.8% and its Tier 1 common capital is up 44bps to 10.1%. This type of capital retention is expected by Fitch and has been incorporated into the bank's current rating and the outlook.
TCB has also shown the ability to manage growth in its auto portfolio through the use of securitization. In 3Q'14, the company executed on an auto securitization of over $250 million of loans on which it recognized a gain of $7.4 million. In Fitch's view, the securitization transaction primarily reflects substantial appetite for auto-related paper by investors. The transaction also points toward the increased credibility of TCF within the indirect auto lending space. Fitch also observes that, to some extent, the transaction shows the infrastructure and risk management systems TCB has built over the past few years in order to gather and store the data necessary to execute on such a securitization.
Fitch notes that earnings have historically been supported by a low-cost deposit base which generated a relatively higher level of noninterest income than peers. While deposit pricing through the industry has converged to historic lows bringing TCB's cost of deposits in-line with peer averages, Fitch would expect the company's earnings to benefit relatively more in a rising rate scenario given the likely sticky nature of its low-balance, high volume deposit base. Nearly 90% of the bank's total deposits are FDIC insured, a level relatively greater than peers. Furthermore, while fee income generated by TCB's deposit base has been reduced due to consumer behavior and the Durbin Amendment, Fitch still expects the company to generate a relatively higher level of income from service charges compared to others in the peer group, a positive rating driver. These expectations are reflected in today's rating affirmation and the outlook.
RATING SENSITIVITIES - IDRS, VRs AND SENIOR DEBT
Fitch will continue to monitor credit risk and risk appetite in TCB's growing national lending platform in relation to those that contend in similar lending spaces. If Fitch observes a relative divergence of credit costs in these portfolios that point toward lax underwriting or monitoring and lead to earnings performance deterioration negative rating action is possible.
Over the rating horizon, Fitch expects TCB's absolute and relative auto loan production to slow given the level of growth the asset class has experienced since TCB got into the space at the end of 2011. However, should auto growth continue to outpace the industry by multiples and the book approaches near 20% of TCB's loan portfolio, adverse rating action could result as Fitch would view the exposure as significantly outsized compared to similarly rated institutions and outside of Fitch's expectations.
Fitch believes TCB's ratings are constrained from upward movement in the near term given its current business strategies and relative asset quality. Over the long term, if asset quality converges with higher rated peers and credit quality in the national lending portfolio remains in line with industry, leading to positive operating results, TCB's ratings or Outlook could be positively impacted.
KEY RATING DRIVERS - HOLDING COMPANY
The IDR and VR of TCB is equalized with its operating company, TCF National Bank, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries.
RATING SENSITIVITIES - HOLDING COMPANY
Should TCB'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 TCB given the strength of the holding company liquidity profile.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
TCB has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, TCB 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
TCB'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 TCB and by various issuing vehicles are all notched down from TCB 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 TCB and its subsidiaries are primarily sensitive to any change in TCB's VR.
KEY RATING DRIVERS - LONG- AND SHORT-TERM DEPOSIT RATINGS
TCB'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 TCB and its subsidiaries are primarily sensitive to any change in TCB's long- and short-term IDRs.
Fitch has affirmed the following ratings with a Stable Outlook:
TCF Financial Corp.
--Long-term IDR at 'BBB-';
--Viability at 'bbb-'.
--Preferred stock at 'B';
--Short-term IDR at 'F3';
--Support Ratings at '5';
--Support Rating Floor at 'NF'.
TCF National Bank
--Long-term IDR at 'BBB-';
--Viability at 'bbb-';
--Long-term deposits at 'BBB';
--Subordinated Debt at 'BB+';
--Short-term IDR at 'F3';
--Short-term Deposits at 'F3';
--Support Ratings at '5';
--Support Rating Floor at 'NF'.
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);
--'Index Trend Analysis - 4Q14 (Fitch Fundamentals Index Remains Neutral)' (January 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).
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978965
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