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Fitch Affirms Astoria Financial's 'BBB-/F3' IDRs; Rating Watch Positive Removed
December 21, 2016 / 8:34 PM / a year ago

Fitch Affirms Astoria Financial's 'BBB-/F3' IDRs; Rating Watch Positive Removed

(The following statement was released by the rating agency) NEW YORK, December 21 (Fitch) Fitch Ratings has affirmed the 'BBB-/F3' Long-Term and Short-Term Issuer Default Ratings (IDRs) of Astoria Financial Corp. (AF) and its principal banking subsidiary, Astoria Bank. The Rating Watch Positive is removed and a Stable Outlook assigned. On Dec. 20, AF and New York Community Bancorp (NYCB; 'BBB+/F2'/Outlook Stable) announced that their boards of directors have mutually agreed not to extend the companies' definitive merger agreement, and to terminate the agreement effective Jan. 1, 2017. A complete list of rating actions follows at the end of this release. KEY RATING DRIVERS IDRS, VIABILITY RATINGS, AND SENIOR DEBT Today's action reflects the announcement that both AF and NYCB have terminated their agreement to merge. Per our Rating Action Commentary on April 7, Fitch noted that should AF's merger with NYCB not close, we would evaluate the reason and assess AF's ratings accordingly. The Rating Watch has been removed and a Stable Outlook assigned to reflect our expectation that the company's financial profile has not changed significantly over the past 12 months and that trends in the company's key credit metrics will persist over the near-to-medium term. Key rating constraints include AF's below-peer profitability, liability sensitive balance sheet positioning, and relatively weaker liquidity profile compared to similarly-rated bank peers. Fitch notes AF's earnings performance will remain under pressure over the near term given the bank's liability-sensitive balance sheet and our expectation that the U.S. Federal Reserve will further increase interest rates in 2017 and beyond. Since late 2015, management has been focused on preparing for and ultimately completing its merger with NYCB. Fitch believes this could have caused some distraction in running the core ongoing operations of the bank, including executing longer-term initiatives related to interest rate risk management and improving the bank's liability sensitivity as well as retaining key personnel. Although the outlook is Stable, we believe that the regulatory issues driving the termination of the merger cast a degree of uncertainty over AF's risk profile and risk management. Offsetting these ratings constraints and questions, the ratings continue to be supported by AF's good asset quality, solid underwriting, and strong capital position. Fitch notes that AF's historical loss experience was fairly low through the last credit cycle and the company maintains a very strong, above-peer level capital position with a CET1 ratio of 17.58% at Sept. 30, 2016. SUPPORT RATING AND SUPPORT RATING FLOOR AF has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, AF is not systemically important and therefore, the probability of support is unlikely. IDRs and Viability Ratings (VRs) do not currently incorporate any support. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES AF's preferred securities are rated five notches below its VR. Preferred stock is notched two times from the VR for loss severity, and three times for non-performance. LONG- AND SHORT-TERM DEPOSIT RATINGS AF'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. HOLDING COMPANY AF has a bank holding company (BHC) structure with the bank as the main subsidiary. IDRs and VRs are equalized with those of AF's operating company and bank reflecting its role as the BHC, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Double leverage is considered manageable at 109% as of Sept. 30, 2016. RATING SENSITIVITIES IDRs, VRS, AND SENIOR DEBT Fitch believes the current rating level has limited upside of over the near-to-intermediate term. AF's ratings are highly sensitive to its ability to retain key personnel following the cessation of the acquisition. In addition, AF ratings would also be very sensitive to its interest rate positioning in a rising rate environment. To the extent AF has increased liability sensitivity, ratings could be negatively pressured. Should any unanticipated adverse regulatory findings emerge, Fitch would likely take negative rating action. Fitch will be monitoring for any other negative implications from the termination of this acquisition, and are sensitive to AF's strategic options following this announcement. Although not anticipated, Fitch considers AF's ratings to also be sensitive to asset quality deterioration. Aggressive capital management could also negatively impact ratings, although that, too, is not expected in the near term. SUPPORT RATING AND SUPPORT RATING FLOOR AF's Support Rating and Support Rating Floor are sensitive to Fitch's assumption as to capacity to procure extraordinary support in case of need. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings of subordinated debt and other hybrid capital issued by AF and its subsidiary are primarily sensitive to any change in AF's VR. LONG- AND SHORT-TERM DEPOSIT RATINGS The ratings of long- and short-term deposits issued by Astoria Bank are primarily sensitive to any change in the company's IDRs. This means that should a Long-Term IDR be downgraded, deposit ratings could be similarly affected. HOLDING COMPANY If AF became undercapitalized or increased its double leverage significantly, there is potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies. Fitch has affirmed the following ratings: Astoria Financial Corporation --Long-Term IDR at 'BBB-'; assigned Stable Outlook; --Short-Term IDR at 'F3'; --Senior Debt at 'BBB-'; --Preferred Stock at 'B' --Viability Rating at 'bbb-'; --Support Rating at '5'; --Support Rating Floor at 'NF'. Astoria Bank (Formerly Astoria Federal Savings and Loan Association) --Long-Term IDR at 'BBB-'; assigned Stable Outlook; --Short-Term IDRat 'F3'; --Long-term Deposits at 'BBB'; --Short-term Deposits at 'F2' --Viability Rating at 'bbb-'; --Support Rating at '5'; --Support Rating Floor at 'NF'. Contact: Primary Analyst Stefan Kahandaliyanage, CFA Associate Director +1-646-582-4918 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Johann Moller, CFA, FRM Associate Director +1-646-582-4954 Committee Chairperson Julie Solar Senior Director +1-312-368-5472 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) 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. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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