Fitch Ratings has affirmed the Long- and Short-Term Issuer Default Ratings (IDRs) of
Fitch has also affirmed the bank's Viability Ratings (VR) at 'bbb'. The Rating Outlook is Stable.
Key Rating Drivers
Affirmation Reflects Strengths: The affirmation of FNNI's rating and Stable Outlook reflects its good financial performance, solid deposit franchise and experienced management team.
Credit Cards Complement Franchise: FNNI operates a robust franchise with solid deposit market share in its core operating footprint. Additionally, FNNI is the 18th largest credit card issuer in the
Elevated Risk Appetite: Fitch considers FNNI's risk appetite to be higher than most of the mid-tier regional peers, due to the bank's concentration in credit card lending, which makes up approximately 47% of the loan portfolio. However, the bank is active in mitigating these risks through appropriate underwriting and solid risk controls. FNNI saw high level of loan growth in 2022, as card balances recovered after limited growth over the prior two years.
Normalization in Credit Performance: FNNI's credit performance began to normalize in 2022 with net charge-offs increasing from the historic lows of 2021, but it remains below pre-pandemic levels. Fitch anticipates FNNI's credit costs will continue to normalize in 2023 especially in the case of an economic downturn. However, Fitch believes that credit losses will prove more stable than in prior cycles, given the shift in focus away from the national card portfolio, which had been a key driver of credit volatility historically.
Earnings Expected to Moderate: FNNI's earnings performance moderated in 2022, compared to record net income in 2021, as elevated provision outpaced growth in net interest income attributable to both NIM expansion and earning asset growth. Fitch anticipates FNNI's earnings will be pressured in 2023, as credit losses normalize and the cost of funds increases, but expects FNNI will continue to generate returns in line with or better than peers.
Moderate Capital Levels: Fitch views FNNI's capital ratios as solid and supportive of its current rating. The bank's CET1 and TCE ratios declined to 11.8% and 9% at YE22 compared to 13.7% and 10.3% at YE21, respectively, reflecting the acceleration in loan growth. Fitch expects FNNI to manage its benchmark CET1 ratio more conservatively than peers, given the bank's concentration in credit card lending.
Sound Funding and Liquidity: FNNI's ratings are supported by the bank's leading market share in
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Fitch expects FNNI's capital ratios will be maintained above peer levels due to elevated risk profile. FNNI's ratings could come under pressure if its common equity Tier 1 (CET1) ratio were to fall below 10.0% and stay there, absent a credible plan to build levels back above this threshold. The ratings would also be sensitive to any changes in capital management that resulted in a rapid decline in the bank's capital levels.
Negative rating momentum could also be driven by material degradation in credit performance relative to peers, especially should losses in the credit card portfolio meaningfully exceed historical levels. Likewise, outsized deterioration in the level or volatility of the bank's earnings, relative to peers, could drive negative rating action.
The ratings would also be sensitive to a weakening liquidity profile or dramatic shift in its funding mix that constraints the company's ability to meet its obligations under a stressed scenario.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Fitch sees limited upside potential for FNNI's ratings in the near term, given its sizable exposure to credit card lending. Over the longer term, positive rating momentum could be driven by continued build-out of the company's franchise, through greater deposit market share and higher contributions from fee income sources. Likewise, upward pressure could emerge should FNNI's financial performance significantly exceed Fitch's expectations. This would be predicated on the company maintaining a conservative risk appetite and sustaining above-peer capital levels.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Subordinated Debt: Fitch has affirmed FNNI's subordinated debt rating at 'BBB-'. The rating is notched one level below FNNI's Viability Rating (VR) for loss severity. In accordance with the 'Bank Rating Criteria,' this reflects alternative notching to the base case of two notches due to Fitch's view of
Long- and Short-Term Deposit Ratings:
Government Support Ratings:
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Subordinated Debt: The rating of FNNI's subordinated debt is sensitive to any positive change to the VR.
Long- and Short-Term Deposit Ratings: The long-term deposit rating is sensitive to any positive change to
VR ADJUSTMENTS
The VR has been assigned in line with the implied VR.
The Asset Quality score of 'bbb' has been assigned below the implied score of 'a' due to a negative adjustment for Concentrations.
The Earnings and Profitability score of 'bbb' has been assigned below the implied score of 'a' due to a negative adjustment for Earnings Stability.
The Capitalization and Leverage score of 'bbb' has been assigned below the implied score of 'a' due to a negative adjustment for Risk Profile and Business Model.
The Funding and Liquidity score of 'bbb+' has been assigned below the implied score of 'a' due to a negative adjustment for Liquidity Access.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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