December 15, 2017 / 9:16 PM / a year ago

Fitch Upgrades Wintrust Financial to 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, December 15 (Fitch) Fitch Ratings has upgraded Wintrust Financial Corp's (WTFC) Long-Term Issuer Default Rating (LT IDR) to 'BBB+' from 'BBB'. Fitch has affirmed WTFC's Short-Term IDR (ST IDR) at 'F2'. The Rating Outlook is Stable. 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, VRs, AND SENIOR DEBT Today's upgrade of WTFC's ratings reflects Fitch's view that the company's current and expected financial performance and condition has converged with higher rated banks. Also underpinning the upgrade is WTFC's consistent strategy and conservative risk culture that have led to relatively lower levels of credit costs over time. Management has shown the ability to methodically and strategically expand WTFC's community banking presence in Chicago and Wisconsin through smaller, whole-bank acquisitions while defending its strong, profitable national lending platforms. Today's action also reflects Fitch's view of WTFC's balance sheet diversity. While the bank's commercial loan portfolio remains heavily tied to the greater Chicagoland and Southeast Wisconsin, Fitch notes that one-third of WTFC's book is tied to its national premium finance business. The line of business, in which WTFC is one of the top three originators in the U.S., provides the company with strong risk adjusted returns and balance sheet diversity and is likely to result in less volatile total credit losses through the next credit downturn relative to peers. Annualized net charge-offs (NCOs) related to WTFC's property and casualty premium finance portfolio have been approximately 20bps over the last 20 quarters while the life insurance premium finance book hasn't had a NCO since 2011. WTFC's continues to have strong asset quality, consistent with that of higher rated peers. Fitch believes this is a reflection of management's consistent conservative credit risk philosophy. Nonperforming assets (NPAs) as a percentage of loans and real estate owned (REO) have continued a downward trend, dropping from 0.73% at third quarter 2016 (3Q'16) to 0.60% at 3Q'17. Fitch notes that the decrease has been accomplished with relatively little credit loss. Total NCOs as a percentage of total loans have averaged just 8 basis points (bps) over the last five quarters when excluding covered loans. While Fitch does not believe this low level of NCOs is sustainable on a quarter-to-quarter basis and thus expects credit costs to revert upwards, WTFC's credit quality is expected to remain a positive outlier going forward. This expectation is incorporated into today's action and the Outlook. WTFC's earnings in the context of balance sheet risk are reasonable and have trended upward even without the benefit from reserve releases. Similar to most banks higher short-term rates have boosted net interest income as WTFC has been able to hold funding costs reasonably stable thus far in the current Fed tightening cycle. While funding costs will likely increase going forward given Fitch's expectations for higher deposit betas, Fitch observes WTFC's operational efficiencies have improved such that its return on average assets (ROA) should generally remain above 90bps over the rating time horizon, a reasonable level relative to its new rating level. Fitch also expects WTFC's earnings volatility to remain low, supported by its aforementioned strong credit culture. These expectations are reflected in today's upgrade and the Outlook Stable. As expected, capital and leverage have improved over the last year with the conversion of its convertible preferred stock into common equity in 2Q17 and the maintenance of reasonable capital distributions. The bank's Fitch Core Capital (FCC) increased to 9.2% from 8.5% a year prior, one of the lowest levels within Fitch's U.S. bank rated universe. However, current capital level is considered adequate relative to the company's overall risk profile. WTFC's rating not only reflects its ability to maintain an adequate capital base through the cycle but also its ability to maintain capital even with strong asset growth and its demonstrated ability to raise capital in the private and public markets. Fitch views WTFC's liquidity and funding profile as solid with essentially all of its funding derived from its core, community bank deposit base. Moreover, Fitch recognizes WTFC's growing presence of non-interest bearing deposits which has been accomplished through its various acquisitions since the financial crisis as well as through the build out of its commercial lending business. Fitch also notes WTFC has historically kept its loan-to-deposit ratio at a manageable 80-90%. While it the ratio has touched 91%-92% over recent periods, management has publically discussed its desired target range. Fitch's expectation that the ratio will remain below peer averages is incorporated into today's rating action. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES WTFC's subordinated debt is notched one level below its VR for loss severity. WTFC's preferred stock is notched five levels below its VR, two times for loss severity and three times for non-performance. These ratings are in accordance with Fitch's criteria and assessment of the instruments non-performance and loss severity risk profiles and have thus been affirmed due to the affirmation of the VR. LONG- AND SHORT-TERM DEPOSIT RATINGS The uninsured deposit ratings of WTFC's bank subsidiaries 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 WTFC's VR is equalized with those of its operating companies and banks, 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. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities. SUPPORT RATING AND SUPPORT RATING FLOOR WTFC 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, AND SENIOR DEBT With today's upgrade, Fitch views WTFC's ratings as solidly situated at their current rating level. Further upside, which would be unlikely, would be predicated on earnings performance and profile in line with that of those banks in the 'A' rating category while maintaining a conservative risk appetite. Fitch also see limited downside to WTFC's current ratings given its consistent strategy and risk culture. Although currently viewed as unlikely, negative trends in capital levels due to a material reversal in current asset quality trends (particularly in the premium finance book) leading to capital deterioration could prompt negative rating action. Fitch expects WTFC to continue to be acquisitive in the community bank space. Fitch would also analyse any individual transaction that did not fit with WTFC's current business model for its strategic and financial implications, which may lead to rating changes. Finally, today's action incorporates the view that WTFC's earnings will continue to benefit from a higher rate environment and remain durable as credit costs revert to historical norms. Should WTFC's earnings performance deteriorate due to higher than expected funding costs or from credit costs that exceed those of peers and similarly rated banks, Fitch could take adverse rating action. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings for WTFC and its operating companies' subordinated debt, trust preferred securities, and preferred stock are sensitive to any change to the VR. LONG- AND SHORT-TERM DEPOSIT RATINGS The long- and short-term deposit ratings are sensitive to any change to WTFC's long- and short-term IDR. HOLDING COMPANY Should WTFC'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 potential that Fitch could notch the holding company VR from the ratings of the operating companies. SUPPORT RATING AND SUPPORT RATING FLOOR Since WTFC'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: Wintrust Financial Corporation --Long-Term IDR to 'BBB+' from 'BBB'; Outlook Stable; --Viability Rating to 'bbb+' from 'bbb'; --Subordinated Debt to 'BBB' from 'BBB-'; --Preferred Stock to 'BB-' from 'B+'; Barrington Bank and Trust Company, NA Beverly Bank and Trust Company, NA Crystal Lake Bank and Trust Company, NA Hinsdale Bank and Trust Company Lake Forest Bank and Trust Company, NA Libertyville Bank and Trust Company Northbrook Bank and Trust Company Old Plank Trail Community Bank, NA Schaumburg Bank and Trust Company, NA St. Charles Bank and Trust Company State Bank of the Lakes Town Bank Village Bank and Trust Wheaton Bank and Trust Wintrust Bank --Long-Term IDR to 'BBB+' from 'BBB'; Outlook Stable; --Viability Rating to 'bbb+' from 'bbb'; --Long-Term Deposits to 'A-' from 'BBB+'. Fitch has affirmed the following ratings: Wintrust Financial Corporation --Short-Term IDR at 'F2'; --Support at '5'; --Support Rating Floor at 'NF'. Barrington Bank and Trust Company, NA Beverly Bank and Trust Company, NA Crystal Lake Bank and Trust Company, NA Hinsdale Bank and Trust Company Lake Forest Bank and Trust Company, NA Libertyville Bank and Trust Company Northbrook Bank and Trust Company Old Plank Trail Community Bank, NA Schaumburg Bank and Trust Company, NA St. Charles Bank and Trust Company State Bank of the Lakes Town Bank Village Bank and Trust Wheaton Bank and Trust Wintrust Bank --Short-Term IDR at 'F2'; --Short-Term Deposits at 'F2'; --Support at '5'; --Support Rating at 'NF'. Contact: Primary Analyst Bain K. Rumohr, CFA Director +1-312-368-3153 Fitch Ratings, Inc. 70 W. 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