Fitch Ratings has affirmed
The Rating Outlook is Stable. CFC does not have a viability rating (VR) as Fitch does not believe that the association would have a meaningful standalone franchise or business model that could exist outside of the
Key Rating Drivers
Strong Franchise, Narrow Business Model: Fitch considers CFC to have a good franchise, given its position as the largest association in the FCBT district and the eighth largest association in the
Funding Structure a Strength: As an ACA, CFC is able to obtain low cost and stable funding via its relationship with the
FCBT Relationship Mitigates Risks: CFC's position as an association under FCBT benefits the association's risk profile given the Service Level Agreement, in which the system bank acts as a service provider for CFC's core systems and risk management infrastructure. FCBT also manages the association's interest rate and liquidity risk, which Fitch views favorably due to FCBT's greater scale.
Consistently Strong Earnings: Fitch views CFC's earnings as a rating strength as the association has historically maintained their earnings performance at the top end of the Agricultural Credit Associations within the
Solid Asset Quality: Fitch views CFC's asset quality as strong and in line with its rating. Although CFC's nonperforming assets ratio of 0.6% is modestly higher than similarly sized ACA's and commercial banks, nonperforming assets as a percentage of total loans remains muted. Despite slightly higher NPAs, CFC's net charge-offs generally trend well compared to the
Capital Levels Below Peers: CFC's capitalization metrics have moderately declined over the last few years, but remain commensurate with the overall rating. CFC had a common equity Tier 1 (CET1) ratio of 11.7% at 3Q22, which is slightly above commercial banking peers but lower than similarly sized ACAs. CFC's CET1 ratio has declined in recent years as the company has experienced heightened loan growth, which Fitch expects to return to historical levels. While Fitch views the company's strong earnings and history of limited credit losses as relative mitigants to lower capital, Fitch is sensitive to CFC's reliance on organic capital generation and unique structure that limits access to equity markets.
Government Support Rating: CFC's GSR of 'ns' reflects Fitch's view that the probability of sovereign support is unlikely, and thus IDRs do not incorporate any sovereign support. While the '
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
CFC's rating remains sensitive to noncompliance with the terms of its General Financing Agreement with FCBT. Additionally, any resulting penalties or restrictive conditions that prevent CFC from cost-effectively funding its operations or lead to the default of the direct note would likely result in a downgrade of the ratings for CFC. Similarly, CFC's ratings would be sensitive to deterioration in FCBT's financial profile which could change CFC's funding access, including FCBT's capital and liquidity position.
Pressure on CFC's ratings could emerge over time should there be evidence of outsized deterioration in credit quality relative to peer associations within both the
CFC's ratings incorporate Fitch's view that the association's earnings profile is among the strongest in its peer group. A deterioration in CFC's earnings, as measured by its ratio of operating profit to risk-weighted assets, to levels at or below the peer median, could result in downwards rating pressure.
CFC's ratings could come under pressure should the bank's CET1 ratio dip below 11.5%, which would be below the threshold for a FIRS 1 rating, which is a rating system used by
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch continues to see limited upside potential for CFC's rating over the Outlook horizon due to the bank's limited business profile. Any long-term positive ratings momentum would be predicated on CFC maintaining its stronger-than-peers earnings profile and low credit losses while sustainably improving its regulatory capital ratios.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
As a prudentially regulated institution, notching of hybrid instruments follows Fitch's Bank Rating Criteria. Preferred securities are notched four times from the IDR, two notches for loss severity and two notches for non-performance. The ratings of CFC's preferred instruments are notched off the IDR, which incorporates CFC's intrinsic risk characteristics. Fitch does not presume any institutional or sovereign support for these instruments. The issuance of hybrid securities by CFC is not covered by the
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
CFC's preferred rating is primarily sensitive to any change in its Long-term IDR.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Criteria Variation
Although Fitch does not assign a VR to CFC, the association's IDR reflects its intrinsic characteristics. As a result of its funding relationship with FCBT and its role as an
For CFC, core funding lies in the form of its direct notes, which Fitch views as a stable source of funding with unique characteristics related to the policy role of the
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
CFC has 'community relations, social access and affordability' scores of '3' which differs from the financial institution standard score of '2' to reflect the extent to which key social services (i.e., farm lending in the
CFC has an 'exposure to environmental impact' score of '3' which differs from the financial institution standard score of '2'. This reflects the way in which environmental impacts are actively managed by CFC in a way that results in no impact to its rating.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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