Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) for
The Short-Term IDRs for both entities were downgraded to 'F3' from 'F2'. The Rating Outlook was maintained at Negative.
Key Rating Drivers
The Short-Term IDRs were downgraded to 'F3' from 'F2', following the downgrade of BKU's funding and liquidity score to 'bbb' from 'bbb+', in accordance with Fitch's Bank Ratings criteria which specifies a minimum funding and liquidity score of 'bbb+' in order to maintain a Short-Term IDR of 'F2' at a Long-Term IDR of 'BBB'.
In maintaining the Negative Outlook, Fitch recognizes that downside risks persist, given the bank's commercial real estate exposures and total loan loss reserves that are lower than peers. Additionally, BKU remains reliant on higher cost, non-core deposit funding which continues to pressure its margin to a greater degree than peers, which is likely to continue to pressure profitability.
Commercially Focused Business: With operations focused in
Moderate Risk Profile: BKU maintains a moderate risk profile with good diversity among lending categories and geographies. The bank is likely to add some incremental geographic diversity, with recent entrees into the
Any shift in business mix or the addition of other lending categories is likely to be undertaken gradually, which Fitch views positively. Fitch views BKU's investment portfolio, which includes collateralized loan obligations (CLOs), commercial mortgage-backed securities (CMBS) and private label residential mortgage-backed securities (RMBS), as moderately less liquid than peers', whose portfolios are largely comprised of
Negative Outlook on Asset Quality: BKU has a significant portion of commercial real estate equaling 24% of the portfolio. This includes a sizeable office portfolio equal to 7% of loans. Notably the bulk collateral in this portfolio is in
Earnings and Profitability Remain Weaker: Fitch views BKU's relatively weak profitability as its primary ratings constraint. BKU continues to lag peers on core profitability metrics. Its ratio of operating profit to risk weighted assets of 0.94%, deteriorated by 53 bps YoY and by 9 bps relative the peer median of 1.37% which declined by a more modest 0.44% in 2023. Higher cash balances in response to last year's regional bank volatility and greater reliance on higher cost deposits, weighed on the net interest margin (NIM) which compressed by 8 bps to 2.61% in 2023. This during a period, when most banks in Fitch's mid-tier regional bank peer group experienced some NIM expansion.
With noninterest income accounting for only 9.9% of revenue, BKU also has less revenue diversity with which to offset weaker net interest income, compared to a peer median of 19.1%. As a result, BKU continues to be challenged in reaching the company's target ROAA, of 1.0% at just 0.49%. Profitability is likely to be pressured further in light of expected deterioration in asset quality and BKU's relatively low reserve coverage of 0.81%, compared to a peer median of 1.1%.
Capital Supports Rating: Fitch has traditionally viewed BKU's capital levels as adequate, particularly in light of its weaker earnings profile. Its's common equity Tier 1 ratio of 11.4% at 4Q23 is higher than the peer median of 10.9%. Fitch anticipates that BKU will continue to manage capital conservatively, with both modest loan growth and dividend increases. Likewise, we view the continued suspension of share repurchases as prudent, amid an uncertain economic outlook and the bank's weaker earnings power. With the bank's funding and liquidity score of 'bbb' in line with its overall rating, and the highest weighted rating factor score, we continue to view capital as supportive of BKU's overall rating.
Higher Reliance on Non-core Deposits: Deposit growth achieved during the pandemic has proved to be less durable than at peers, with deposits declining 9.9% since 2021, compared to a median increase of 2.7% for peers. Additionally, BKU has also increased its reliance on non-core deposits, including CDs and brokered deposits, which contributed to it having the third highest cost of deposits among peers, 0.56% above the peer median.
In light of this, Fitch has downgraded BKUs funding and liquidity factor score to 'bbb' from 'bbb+', viewing it as more consistent with its current funding and liquidity profile. This downgrade drove the downgrade of BKU's Short-Term IDR to 'F3' from 'F2', per Fitch's bank rating criteria, which specifies a minimum funding and liquidity score of 'bbb+' at BKUs Long-Term IDR rating level of 'BBB' to achieve an 'F2' rating.
Available liquidity, including cash, unencumbered securities and contingent FHLB and Fed discount window borrowing capacity, are viewed as providing sufficient coverage of uninsured and uncollateralized deposits at 1.52x.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A continued deterioration in profitability such that BKU's four-year average operating profit to risk-weighted average (RWA) falls below 1.0%;
Significant deterioration in asset quality that results outsized loan losses or a ratio of impaired loans significantly above peer median levels;
Outsized attrition of customer deposits that required significantly higher levels of wholesale funding or brokered deposits.
Fitch views BKU's sizable exposure to CLOs, CMBS and private label RMBS as atypical among its midsized regional peers. Fitch views these securities as more illiquid than
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
With the Negative Rating Outlook on Negative, positive rating action is unlikely. Over the intermediate/long term, factors that could positively influence BKU's ratings include its NIM rising above the peer median; or a proportion of noninterest income to total revenue and/or stronger earnings and profitability, as measured by operating profit to RWA, aligning with higher rated peers while also maintaining a moderate risk appetite.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Subordinated Debt
BKU's subordinated debt rating of 'BBB-' reflects one notch for loss severity. In accordance with Fitch's Bank Rating Criteria, this reflects alternate notching to the base case of two notches due to our view of
Long- and Short- Term Deposit Ratings
The uninsured deposit rating of BKU's banking subsidiary are rated one notch higher than the bank's IDRs because
Government Support Rating
BKU has a Government Support Rating (GSR) of 'ns'. In Fitch's view, the probability of support is unlikely. IDRs and VRs do not incorporate any support.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Subordinated Debt
Subordinated debt ratings are primarily sensitive to any change in BKU's VR.
Long- and Short-Term Deposit Ratings
The long- and short-term deposit ratings are sensitive to any changes BankUnited's long- and short-term IDRs.
Government Support Rating
BKUs GSR is rated 'ns' and there is limited likelihood that these ratings will change over the foreseeable future.
SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS
Holding Company
BKU's Viability Rating (VR) is equalized with that of its bank subsidiary
SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES
Holding Company
Should BKU begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, Fitch could notch the holding company IDR and VR from the ratings of the operating companies.
VR ADJUSTMENTS
The Asset Quality score of 'bbb' has been assigned below the implied 'a' category score due to these adjustment reason(s): Non-Loan Exposure (negative) and Historical and Future Metrics (negative).
The Capitalization and Leverage score of 'bbb' has been assigned below the implied 'a' factor score due to the following adjustment reason: Internal Capital Generation and Growth (negative).
The Funding and Liquidity score of 'bbb+' has been assigned below the implied 'a' factor score due to these adjustment reason(s): Deposit Structure (negative).
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
(C) 2024 Electronic News Publishing, source