January 23, 2017 / 8:44 PM / 3 years ago

Fitch Affirms BOK Financial at 'A'; Outlook Revised to Stable

(The following statement was released by the rating agency) CHICAGO, January 23 (Fitch) Fitch Ratings has affirmed BOKF's ratings at 'A/F1'. The Rating Outlook has been revised to Stable from Negative. See the full list of rating actions at the end of this release. The rating action follows a periodic review of the mid-tier regional banking group, which includes BankUnited Inc. (BKU), BOK Financial Corp. (BOKF), Cathay General Bancorp (CATY), East West Bancorp (EWBC), First Republic Bank (FRC), First Horizon National Corp. (FHN), First National of Nebraska Inc. (FNNI), Fulton Financial Corp. (FULT), Hilltop Holdings, Inc. (HTH), Synovus Financial Corp. (SNV), TCF Financial Corp. (TCB), Trustmark Corp. (TRMK), UMB Financial Corp. (UMBF) and Wintrust Financial Corp. (WTFC). Company-specific rating rationales for the other banks are published separately, and for further discussion of the midtier regional bank sector in general, refer to the special report titled 'U.S. Banks: Mid-tier Regional Bank Periodic Review,' to be published shortly. KEY RATING DRIVERS ISSUER DEFAULT RATINGS (IDRS) AND VIABILITY RATING (VR) Today's affirmation and Outlook revision reflects BOKF's ability to reasonably control credit losses through a sustained energy price downturn such that, in Fitch's view, earnings and capital have not been materially impacted. Even with over 15% of loans being directly tied to energy, an outlier in Fitch's rate universe, the loss content within nonperforming energy assets has been minimal given the company's strong underwriting and expertise within the energy-lending space. Nonperforming assets (NPAs; excluding government guaranteed loans) have noticeably increased year-over year and represented 1.65% of total loans plus other real estate owned at third quarter 2016 (3Q16), up from 0.8% a year prior. Fitch notes that much of the increase occurred in 1Q16 during a regulatory review of energy-related Shared National Credits. However, even with higher NPA levels, credit losses have not been outsized. Net charge-offs (NCOs) during 1Q16 spiked at 0.56% of average loans, the highest NCO rate BOKF has reported since the tail-end of the financial crisis. Still, reported credit losses have fallen over the last two quarters and BOKF's average NCO rate remains well-below peers. Over the last 10 quarters, BOKF's NCO rate has averaged 8bps vs a peer median of 16bps. Fitch notes that this is likely the result of the composition of BOKF's energy loan portfolio which is almost exclusively reserved-based (as opposed to oil field service companies) and lent on a senior secured basis. Fitch's expectations that average credit losses will remain manageable and below those of BOKF's peers is reflected into today's affirmation and Outlook revision. Today's affirmation and Outlook revision also reflect Fitch's view of BOKF's expected earnings performance. While earnings have been below that of historical levels and peers due to higher provisioning, on a forward-looking basis, Fitch expects BOKF's return's to converge with historical levels as credit provisioning abates given more stable energy prices. The company took $65 million of credit provisions through 3Q16 compared to just $11.5 million though 3Q15 due to a higher level of NPAs, resulting in a year-to-date return on assets (ROA) of 76bps, below the peer median of 86bps and below similarly rated banks. Moreover, management indicated that 4Q16 earnings would be negatively impacted by a mortgage-servicing-right hedging loss as the result of long-term rates climbing post-election. However, management expects the bank's full-year 2017 provision to be $20 million-$30 million. Given BOKF's relatively high allowance to loans at nearly 1.5% and solid energy loan reserve coverage at over 3.5% of loans, this level appears reasonable. Fitch expects provisioning at this level to result in an above-average ROA on a consistent basis, an attribute that has historically supported a relatively higher rating than its peers. Earnings should also continue to be aided by a good contribution from non-interest income which approximates nearly 50% of the company's revenue, as well as satisfactory operating expense management as demonstrated by a mid-60% efficiency ratio. Moreover, the company has been able to maintain above-average capital levels throughout the energy downturn, even while increasing its dividend during 2016, its 11th year in a row with a dividend increase. BOKF's Fitch Core Capital-to-Risk-Weighted Assets ratio was 11.5%, around 65bps higher than the peer median. The company has typically maintained capital above peers, which has supported a relatively higher rating over time. Fitch's expectations that this will continue to be the case is incorporated into today's affirmation and Outlook revision. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES BOKF's subordinated debt is notched one level below its VR of 'a' for loss severity. This is in accordance with Fitch's criteria and assessment of the instruments non-performance and loss severity risk profiles and has thus been affirmed due to the affirmation of the VR. LONG- AND SHORT-TERM DEPOSIT RATINGS BOKF's uninsured deposit ratings at the subsidiary banks 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 BOKF's IDR and VR are equalized with those of BOKF, NA, 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 BOKF has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, BOKF is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support. RATING SENSITIVITIES VR AND IDR BOKF is currently one of the highest-rated banks within Fitch's mid-tier bank peer group. As such, upward rating potential is unlikely. Conversely, negative rating action may ensue should Fitch observe higher than expected credit losses being generated out of BOKF's loan portfolio that result in structurally lower earnings performance and capital level at or below peers'. Another potential negative rating sensitivity is the knock-on effects of reduced economic activity due to continued lower energy prices in BOKF's core markets of Oklahoma and Texas. Together, these two geographies represent over 70% of BOKF's overall loan portfolio. Economic indicators in these geographies have remained fairly resilient as the economies have diversified substantially since the energy crisis in the late 1980s. However, should they begin to exhibit weaknesses, it could at minimum result in middling loan growth opportunities, or, more severely, result in other commercial and commercial real estate (CRE) loan losses for BOKF given its comparatively high concentration in CRE at just over 20% of the loan portfolio. Such trends could result in negative rating action on BOKF's Outlook or rating. Fitch expects BOKF to be active in merger and acquisition (M&A) for both banks and nonbanks. Fitch expects this M&A activity to be reasonable in size, in geography and within the bank's core competencies. To the extent that BOKF partakes in M&A activity that does not fit these attributes and/or results in earnings and capital metrics that are not commensurate with its rating level, Fitch could take negative rating action. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings for BOKF and its operating companies' subordinated debt and preferred stock are sensitive to any change to its VR. LONG- AND SHORT-TERM DEPOSIT RATINGS The long-and short-term deposit ratings are sensitive to any change to BOKF's long-and short-term IDR. HOLDING COMPANY Should BOKF'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 the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies. SUPPORT RATING AND SUPPORT RATING FLOOR Since BOKF's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future. The rating actions are as follows: Fitch has affirmed the following ratings and the Outlook revised as indicated: BOK Financial Corporation --Long-Term IDR at 'A'; Outlook to Stable from Negative; --Short-Term IDR at 'F1'; --Viability Rating at 'a'; --Subordinated debt at 'A-'; --Support Floor at 'NF'; --Support at '5'. BOKF, N.A. --Long-Term IDR at 'A'; Outlook to Stable from Negative; --Long-term deposit at 'A+' --Short-Term IDR at 'F1'; --Short-term deposit at 'F1'; --Viability Rating at 'a'; --Support Floor at 'NF'; --Support at '5'. Contact: Primary Analyst Bain K. Rumohr, CFA Director +1-312-368-3153 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Justin Fuller, CFA Senior Director +1-312-368-2057 Committee Chairperson Christopher Wolfe Managing Director +1-212-908-0771 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1017937 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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