Fitch Ratings has downgraded People's United Financial's (PBCT) ratings to 'BBB+/F2'. The Rating Outlook is revised to Stable from Negative. The downgrade reflects PBCT's declining capital levels, elevated commercial loan growth and profitability well below its rated peers.
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
PBCT's 'BBB+' ratings continue to reflect the company's good history of execution on its strategy, solid management team and low credit costs through the cycle. However, Fitch has downgraded PBCT's ratings due to capital levels declining below peer medians combined with elevated commercial loan growth and continued earnings weakness. Fitch had previously considered capital a relative rating strength versus peers, and to the extent capital levels were managed down, PBCT would improve earnings and profitability.
PBCT's tangible common equity ratio declined to 7.5% at year-end 2014, which is lower than Fitch's expectation. Although capital levels are still satisfactory, the lower capital buffers along with loan growth and relatively weak earnings no longer compare favorably to peers rated in the 'A-' category.
Asset quality is the primary ratings strength for the institution. The company experienced lower levels of problem loans and had much less loss content than its peer banks. Fitch attributes the superior performance to solid underwriting, relatively stronger local markets and sound credit risk management. However, PBCT has experienced very strong commercial loan growth over multiple years, which Fitch believes could lead to asset quality performance below the company's very strong historical trends.
Earnings remain a drag on PBCT's ratings. PBCT's earnings rank near the bottom of the mid-tier bank peer group. Weak earnings are primarily attributable to low interest rates which have resulted in NIM compression felt by most of the industry. Although PBCT's balance sheet is asset sensitive and should benefit in a rising rate environment, Fitch expects earnings to perform below the peer median over the medium term based on returns on average assets. However, in a scenario where short-term rates rise significantly, Fitch expects that PBCT's earnings will improve more dramatically to levels in line with the mid-tier peer group.
RATING SENSITIVITIES - IDRs, VRs AND SENIOR DEBT
PBCT's ratings are primarily sensitive to asset quality. Should asset quality metrics begin to deteriorate, particularly in the commercial loan category, PBCT's ratings could be downgraded further. Conversely, positive ratings action would be predicated upon a number of factors, namely seasoning of the loan portfolio with minimal credit deterioration, material earnings improvement commensurate with higher rated institutions and moderated loan growth.
RATING SENSITIVITIES - HOLDING COMPANY
Should PBCTs 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 PBCT given the strength of the holding company liquidity profile.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
PBCT has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, PBCT 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
PBCT'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 PBCT and by various issuing vehicles are all notched down from PBCT 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 PBCT and its subsidiaries are primarily sensitive to any change in PBCT's VR.
To the extent that one of PBCT's subsidiary or affiliated companies is not considered to be a core business, Fitch could also notch the subsidiary's rating from PBCT's IDR.
KEY RATING DRIVERS - LONG- AND SHORT-TERM DEPOSIT RATINGS
PBCT'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 PBCT and its subsidiaries are primarily sensitive to any change in PBCT's long- and short-term IDRs.
Fitch has downgraded the following ratings and revised the Outlook to Stable from Negative:
People's United Financial, Inc.
--Long-term IDR to 'BBB+' from 'A-';
--Viability rating to 'bbb+' from 'a-';
--Senior unsecured to 'BBB+' from 'A-';
--Short-term IDR to 'F2' from 'F1;.
People's United Bank
--Long-term IDR to 'BBB+' from at 'A-';
--Viability rating to 'bbb+' from 'a-';
--Subordinated debt to 'BBB' from 'BBB+'
--Long-term deposits to 'A-' from 'A';
--Short-term IDR to 'F2' from 'F1';
--Short-term deposits to 'F2' from 'F1'.
Chittenden Corporation
--Subordinated debt to 'BBB' from 'BBB+'.
Fitch has affirmed the following ratings
People's United Financial, Inc.
--Support at '5';
--Support floor at 'NF'.
People's United Bank
--Support at '5';
--Support 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. 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);
--'Index Trend Analysis - 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).
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978959
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