December 15, 2017 / 9:26 PM / a year ago

Fitch Upgrades Cathay Bank to 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, December 15 (Fitch) Fitch Ratings has upgraded Cathay Bank's long-term Issuer Default Rating (IDR) to 'BBB-' from 'BB+' and Viability Rating (VRs) to 'bbb-' from 'bb+'. Fitch has also upgraded the companies' short-term IDRs (IDRs) to 'F3' from 'B'. The Rating Outlook has been revised to Stable from Positive. At the same time, Fitch has affirmed Cathay General Bancorp's (CATY) IDR at 'BB+' and VR at 'bb+'. The Rating Outlook has been revised to Stable from Positive. A full list of rating actions follows at the end of this press release. The rating action follows a periodic review of the midtier regional banking group, which includes BankUnited, Inc. (BKU), BOK Financial Corp. (BOKF), Cathay General Bancorp (CATY), East West Bancorp, Inc. (EWBC), First Horizon National Corporation (FHN), First National of Nebraska, Inc. (FNNI), Fulton Financial Corporation (FULT), Hilltop Holdings Inc. (HTH), Synovus Financial Corp. (SNV), Trustmark Corporation (TMRK), UMB Financial Corp. (UMBF), Umpqua Holdings Corporation (UMPQ) and Wintrust Financial Corporation (WTFC). Company-specific rating rationales for the other banks are published separately, and for further discussion of the large regional bank sector in general, refer to the special report titled 'Midtier Regional Bank Periodic Review,' to be published shortly. KEY RATING DRIVERS IDRs and VRs Today's action reflects CATY's consistently high levels of profitability, improved asset quality and strong capital levels such that, in Fitch's view, its risk profile is in line with investment grade peers. Profitability remains a rating strength for CATY. The company reported an annualized return on average assets of 1.39% over the first nine months of 2017, making it one of the best performing banks in Fitch's midtier regional bank peer group. CATY is one of the most efficient banks in the U.S. and reported an efficiency ratio of 43.7% for the first nine month of this year. Earnings were also supported by a significant improvement in the net interest margin over the year as well as strong asset quality that resulted in continued provision releases. Still, CATY's loan-loss-allowance as a percentage of total loans was in line with the mid-tier peer group median as of 3Q17. The rating upgrade is also supported by CATY's success in working out of legacy problem loans at reasonable loss levels. Fitch calculates CATY's NPA ratio (inclusive of accruing TDRs) at 1.19% as of 3Q17 which is lower than the Fitch mid-tier peer group median. Absolute dollar NPA's declined by $2.2 million year-over-year at 3Q17. CATY's average annualized NCO rate of 0.68% over the last 40-quarters compared favorably relative to most equally rated midtier peers. Fitch attributes this performance to CATY's strong loan underwriting practices. CATY grew loans organically by roughly 8% year-over-year as of 3Q17. Fitch views this level of growth as manageable relative to the company's level of internal capital generation. However, Fitch notes that growth at CATY and other midtier banks have exceeded large regional peers. Fitch has a cautious view towards loan growth at this point in the credit cycle, especially as rates are expected to continue a normalizing trend while collateral valuations and competitive conditions in CRE and construction lending remains elevated. CATY's strong levels of internal capital generation relative to growth combined with a conservative dividend pay-out ratio of 30%-40% resulted in a capital build over the last year. Accordingly, CATY's CET 1 ratio peaked at 13.26% in 2Q17. The company's CET 1 ratio decreased by 42bps year-over-year as of 3Q17 despite the closing of CATY's acquisition of SinoPac Bancorp (SinoPac) on July 14, which resulted in a 104bps decline in capital relative to the linked quarter. Capital management has remained in line with Fitch's expectations and further supports todays rating action. LONG- AND SHORT-TERM DEPOSIT RATINGS The uninsured deposit ratings of Cathay Bank are rated one notch higher than the bank'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. HOLDING COMPANY CATY's VR and IDR is notched once level below Cathay Bank reflecting our view of more aggressive holding company liquidity management relative to peers. Fitch notes that it is likely that CATY will be reliant on dividend capacity and distributions from Cathay Bank to cover the next 12 months-worth of shareholder dividends and other cash outflows. Fitch is of the view that this approach to liquidity management is not commensurate with an investment grade rating. SUPPORT RATING AND SUPPORT RATING FLOOR CATY has a Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'NF'. In Fitch's view, the probability of support is unlikely. IDRs and VRs do not incorporate any support. RATING SENSITIVITIES IDRs, VRs Following today's rating action and revision of the Rating Outlook to Stable, potential for further ratings upside is limited. Over the longer term, should CATY's credit loss experience continue to outperform equally rated peers all the while capital and earnings are maintained above the peer median, positive rating action could develop. Conversely, should CATY experience credit deterioration at a rate faster than peers such that its earnings and capital metrics converge with of fall below equally rated midtier peers, negative ratings action will likely be taken. CATY completed its merger with SinoPac on July 14, 2017 and the merger of Cathay Bank and Far East National Bank (FENB) closed on Oct. 27, 2017. Today's rating action incorporates Fitch's expectation that CATY will successfully and smoothly integrate Sinopac and FENB into its operations. Evidence to the contrary could place negative pressure on the ratings. Incorporated in CATY's ratings is Fitch's expectation that the company will maintain high levels of capital relative to peers to compensate for high levels growth and product concentration in its loan book. The investor commercial real estate portfolio stood at 305% of Cathay Bank's risk-based capital as of 3Q17 (regulatory definition). Accordingly, should CATY manage capital more aggressively such that it such that its CET 1 ratio falls below the median for the Fitch midtier peer group, negative ratings pressure could develop. Finally, subject to the successful integration of FENB, the rating also factors in the possibility of further merger and acquisition (M&A) activity by CATY. Such consolidation activity will not be viewed negatively should it result in diversification of CATY's loan portfolio, strengthening of the franchise and remain within CATY's area of expertise. That said, our baseline assumption is that the M&A will also not result in either a material execution and integrations risks or an outsized decline in capital ratios. Fitch also assumes that future M&A will not place material strain on the liquidity position of CATY or the bank. LONG- AND SHORT-TERM DEPOSIT RATINGS The long- and short-term deposit ratings are sensitive to any change to Cathay Bank's long- and short-term IDR. HOLDING COMPANY Over time, should CATY significantly improve the holding company finances and liquidity such that cash flow coverage and liquidity management practices align with our expectations for investment grade peers, positive ratings momentum could develop for CATY. SUPPORT RATING AND SUPPORT RATING FLOOR Since CATY's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future. Fitch has upgraded the following ratings: Cathay Bank --Long-term IDR to 'BBB-' from 'BB+'; Outlook revised to Stable from Positive; --Short-term IDR to 'F3' from 'B'; --Viability Rating to 'bbb-' from 'bb+'; --Long-term deposits to 'BBB' from 'BBB-'. Fitch has affirmed the following ratings: Cathay General Bancorp --Long-term at 'BB+'; Outlook revised to Stable from Positive; --Short-term IDR at 'B'; --Viability Rating at 'bb+'; --Support '5'; --Support Floor 'NF'. Cathay Bank --Support '5'; --Support Floor 'NF'. --Short-term deposits at 'F3'. Contact: Primary Analyst Johannes J. Moller, CFA Associate Director +1-646-620-8867 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Julie Solar Senior Director +1-312-368-5472 Committee Chairperson Christopher Wolfe Managing Director +1-212-908-0771 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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