January 23, 2017 / 8:54 PM / 3 years ago

Fitch Affirms BankUnited, Inc.'s IDRs at 'BBB/F2'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, January 23 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDRs) at 'BBB' and Short-Term IDRs at 'F2' for BankUnited, Inc. (BankUnited) and BankUnited, N.A. The Rating Outlook is Stable. 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 mid-tier 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 IDRS, VRs, AND SENIOR DEBT The ratings reflect BankUnited's developing franchise with a growing position in the New York multifamily market and solid foundation in the Florida commercial market. The rating also reflects a seasoned management team with a solid reputation in the company's core markets, good earnings performance supported by a relatively good cost structure, and solid asset quality. Fitch views the company's capital adequacy and liquidity as consistent with the rating level and overall risk appetite. Rating constraints include BankUnited's comparatively short operating history under current management, above-peer-level loan growth, comparatively narrow geographic exposure, low proportion of non-interest income versus peers, and, in Fitch's view, modest key man risk. Fitch believes BankUnited has an experienced executive management team and considers it a key credit strength. The company's regional management team is deep and stable with a number of senior managers having solid commercial banking experience on both the lending and deposit-taking sides of the business. Effective Jan. 1, Raj Singh, BankUnited's Chief Operating Officer, succeeded John Kanas as President and Chief Executive Officer. Singh, along with Kanas, was one of the founders of BankUnited in 2009. Fitch believes that key man risk is mitigated by Singh's appointment to CEO, continued management bench strength, and Kanas retaining the role of Chairman. Ultimately, Singh's appointment to CEO brings further clarity to succession planning, which we believe should be viewed positively overall. The company's high-growth model and manageable branch footprint/cost structure in New York and Florida has led to good profitability metrics. However, going forward, we expect profitability to come under pressure as the covered loan portfolio runs off and the company grows deposits in a rising interest rate environment. In addition, revenue diversification is viewed as a rating constraint given the company is very spread reliant. BankUnited reported non-interest income-to-total revenues of about 9% compared to the mid-tier peer median of 31%. BankUnited's non-performing asset (NPA) ratio in the non-covered loan portfolio was 96bps at third quarter 2016 (3Q16), which compares well to mid-tier peers and supports the current ratings. However, Fitch recognizes that industry-wide credit performance has been supported by relatively benign credit conditions during this phase of the cycle. For the industry, Fitch anticipates some reversion to long-run averages of non-performing loans and losses from current unsustainably low levels. For many loan classes, asset quality is at or close to peak performance. BankUnited has seen increased nonaccrual inflows in its C&I portfolio driven by its New York City taxi medallion exposure ($192 million or 1% of total loans and 8% of tangible common equity). Although Fitch believes the loan loss reserve level and charge-offs related to the taxi medallion portfolio could increase, due to the small size of the portfolio relative to total loans, earnings would likely be modestly affected rather than capital. Fitch views BankUnited's capital adequacy and liquidity metrics as consistent with the rating level and the company's overall risk appetite. Fitch expects capital adequacy and liquidity metrics to improve as the company focuses on its national commercial deposit growth strategy in 2017, while actively slowing loan growth. Fitch considers BankUnited's capital to be adequate for the current rating level with Common Equity Tier 1 risk-based capital of 11.6% at Sept. 30, 2016, slightly above the mid-tier median of 11.4%. BankUnited, N.A.'s Tier 1 leverage ratio was 9.3% at 3Q16, above the OCC requirement of 8% (the requirement dates back to the bank's FDIC-assisted acquisition in 2009). To support capital levels, management expects to continue to opportunistically raise debt capital. Historically, the company's high loan growth model has been funded by modest growth in deposits, FHLB advances, and senior unsecured debt. Deposit growth especially in competitive markets such as New York and Florida has led to deposit cost more than 30bps above the median peer deposit cost. As BankUnited's national commercial deposit gathering initiative unfolds in 2017, this should decrease wholesale funding reliance and stabilize the loan-to-deposit ratio. BankUnited's loan-to-deposit ratio is currently 101%, which is high compared to the median mid-tier peer of 92%. The company's strategy is focused on growing loans and gathering deposits in New York and Florida with its national platform providing additional asset growth and potential diversification. Although Fitch recognizes the overall strengths of these markets, particularly the company's focus on relatively top-performing metropolitan areas, BankUnited's geographic concentration remains high compared to Fitch's mid-tier peer universe. LONG- AND SHORT-TERM DEPOSIT RATINGS BankUnited'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 BankUnited's IDR and Viability Rating (VR) are equalized with those of BankUnited, N.A., 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 BankUnited and BankUnited, N.A. have a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, BankUnited and BankUnited, N.A. are not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support. RATING SENSITIVITIES IDRS, VRs, AND SENIOR DEBT Fitch believes the ratings are currently well positioned and sees limited upside over the near-to-intermediate term. The ratings are sensitive to earnings deterioration or asset quality falling below similarly rated Fitch mid-tier peer averages. In the near term, we expect earnings to come under pressure as the covered loan portfolio runs off and as the company grows deposits in a rising interest rate environment. Longer term, as core lending markets become more competitive, there is risk that underwriting standards could come under pressure, potentially leading to diminished asset quality, higher provisioning, and lower future earnings. Further, we note BankUnited's loan growth is above peer averages. Although not anticipated, Fitch could undertake a review of the ratings should there be a material reduction in balance sheet liquidity as evidenced by loans-to-deposits increasing to the 105%-110% range, increased leverage, or adverse regulatory findings. Longer term, positive ratings momentum could be driven by successful execution of the company's deposit growth strategy, increased scale, or improved diversity among geographies and loan products, non-interest revenue sources, or as top-quartile performance through the cycle is demonstrated. Given the emphasis Fitch places on senior management at BankUnited, the ratings are sensitive to key man risk. Material unexpected departures or changes in senior management at either the holding company or bank could prompt a review of the ratings. However, Fitch acknowledges that key man risk is partially mitigated by a deep bench of seasoned executives at the bank level as well as Raj Singh's appointment to CEO, which brings clarity to succession planning at the executive level. LONG- AND SHORT-TERM DEPOSIT RATINGS The long- and short-term deposit ratings are sensitive to any change to BankUnited's long- and short-term IDR. HOLDING COMPANY Should BankUnited 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 BankUnited's and BankUnited, N.A.'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 affirmed the following ratings: BankUnited, Inc. --Long-Term IDR at 'BBB'; Outlook Stable; --Senior Debt at 'BBB'; --Short-Term IDR 'F2'; --Viability Rating at 'bbb'; --Support Rating at '5'; --Support Floor at 'NF'. BankUnited, N.A. --Long-Term IDR at 'BBB'; Outlook Stable; --Short-Term IDR at 'F2'; --Long-term Deposits at 'BBB+'; --Short-term Deposits at 'F2'; --Viability Rating at 'bbb'; --Support Rating at '5'; --Support 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 Johannes Moller Associate Director +1-646-582-4954 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=1017940 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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