Fitch Ratings has affirmed
The Rating Outlook is Stable.
Key Rating Drivers
The VR is intended to measure an institution's intrinsic credit worthiness absent any extraordinary support. CFC's current Long-Term IDR of 'BBB' effectively reflects Fitch's view of CFC's standalone credit profile, absent government support. Thus, the assignment of a VR better articulates this point of view.
Strong Franchise, Narrow Business Model: Fitch considers
Nevertheless, Fitch views CFC's business profile as a rating constraint, as the association's business model is narrowly focused compared to similarly sized commercial banks. While this mainly relates to a spread-income focused revenue mix, Fitch also considers the firm's ties to agricultural and economic activity within
FCBT Relationship Mitigates Risks: CFC's position as an association under FCBT benefits the association's risk profile given the Service Level Agreement (SLA), 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 risks, which Fitch views favorably due to FCBT's greater scale.
Solid Asset Quality: Fitch views CFC's asset quality as strong and in line with its rating. CFC's impaired loans ratio of 0.56% was modestly lower than similarly sized ACAs, while slightly higher than commercial banks peers. Impaired loans remain below CFC's four-year average of 0.67%. CFC's net charge-offs continue to trend well compared to the
Earnings Show Resilience: Fitch continues to view CFC's earnings as a rating strength as the association maintains earnings performance at the top end of ACAs within the
Capital Levels Remain Below Peers: CFC's capitalization metrics increased moderately in 2023, but remain on the lower end relative to peer associations. CFC's common equity Tier 1 (CET1) ratio increased 30bps to 11.6% in 3Q23, which is slightly above commercial banking peers but lower than similarly sized Agricultural Credit Associations (ACAs). CFC's CET1 ratio declined as the association experienced heightened loan growth from 2020 to 2022. Fitch expects loan growth to stabilize to historical levels and maintain CET1 at current 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 cooperative structure that limits access to equity markets.
Funding Structure a Strength: As an ACA, CFC is able to obtain low-cost and stable funding via its relationship with the FCBT, which in turn issues debt via the
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 'AA+' and 'A+' ratings for the
Furthermore, while the ratings of 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 10% for multiple quarters without a credible plan to rebuild it within a reasonable timeframe.
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.
VR ADJUSTMENTS
CFC's VR is one notch below the 'bbb+' implied VR score due to the higher influence of the company's Business Profile which is assessed by Fitch at 'bbb'.
The Asset Quality score has been assigned below the implied score due to the following adjustment reasons: Concentrations, Underwriting Standards and Growth.
The Capitalization and Leverage score has been assigned below the implied score due to the following adjustment reasons: Risk Profile and Business Model.
Criteria Variation
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.
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 www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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