WINTRUST FINANCIAL CORPORATION
Fitch Ratings has affirmed
The Rating Outlook is Stable. In addition, the Government Support Ratings (GSR) have been affirmed at 'ns'.
Key Rating Drivers
Affirmation Reflects Strengths: The affirmation of WTFC's ratings reflects the company's consistent performance through 2023, marked by resilient asset quality, deposit growth, adequate capitalization, and strong net interest income offsetting fee revenue pressures associated with higher interest rates. Additionally, the rating reflects WTFC's strong company profile, characterized by stability and a low risk appetite.
Franchise Supports Rating: WTFC has established a meaningful market position and continues to gain share in the
Risk Management a Strength: Fitch views WTFC's conservative risk culture and prudent risk management practices as a ratings strength. These practices are marked by careful loan portfolio composition and diligent underwriting leading to low losses through the cycle. While asset sensitive and fairly spread reliant in elevated rate environments, with net interest income making up 81% of total revenues in 2023, Wintrust has worked to reduce the expected income impacts of both increases and decreases in rates over the last year, and employs interest rate swaps and collars to mitigate exposure. Fitch believes the directional diversity of income sensitivities to interest rate changes across the business lines provides somewhat of a hedge to revenues across interest rate changes.
Strong Credit Quality: WTFC's better than peer credit performance remains a ratings strength. Impaired loans as a percentage of gross loans have remained relatively stable and well below pre-pandemic levels, comparing favorably with peers. Reserve coverage on the core loan portfolio, excluding the structurally low-loss premium finance book, of 1.55% at YE23 is among the highest in the peer group.
At YE23, approximately 52% of Wintrust's allowance for loan losses was associated with commercial real estate loans, representing coverage of approximately 2% of the CRE portfolio. Fitch expects credit metrics to continue to normalize towards pre-pandemic levels over 2024, particularly if the macroeconomic environment deteriorates, but remain manageable and supportive of the rating.
Business Mix Stabilizes Earnings: WTFC's revenue diversity across interest and non-interest-based sources provides stability across shifting interest rate environments, and has led to consistent net income growth through rate cycles. Operating profit as a percentage of risk-weighted assets has historically trended below the peer median, but Fitch views the diversity and stable growth of earnings over the longer term favorably.
Net interest income increased 23% yoy and net interest margin expanded in FY23, as yields on earning assets outpaced increasing deposit costs following Fed rate hikes. Notably, despite a significant CECL model-driven and largely proactive reserve build of approximately
While mortgage banking revenues were down in FY23 as elevated interest rates pressured refinancing incentives for borrowers, Fitch expects that Wintrust would be well positioned to capitalize on an increase in refinancing demand should rate cuts materialize over the next year.
Capital Levels Supported by Risk Profile: Fitch considers WTFC's capital management policies as commensurate with the rating. The CET1 ratio of 9.4% at YE23 is up from the prior year, primarily due to continued strong earnings growth that was accretive to capital. The potential impact of unrealized losses is manageable and decreasing, and the CET1 ratio marked for accumulated other comprehensive losses of 8.7% at YE23 is improved from 8.1% in the prior year.
While WTFC's CET1 ratio is nominally among the lowest in its peer group, the 100% risk-weighting of the low and no loss premium finance loans results in a diluted CET1 ratio that does not entirely represent capital relative to the risk of the loan portfolio. Fitch views capital levels as adequate given Wintrust's credit diversification and the overall conservative risk profile.
Increased Funding Costs Anticipated; Expected to be Manageable: Amidst increased deposit competition following liquidity pressures on some regional banks early last year, loan growth outpaced deposit growth yoy. This contributed to a loan-to-deposit ratio of 92.0% at YE23, up from 90.67% at the prior year end. Fitch expects that the loan-to-deposit ratio will moderate downwards over the next year as deposit growth remains consistent.
Elevated rates led to a shift in the deposit mix toward interest-bearing products, which at YE23 comprised 77% of total deposits, up from 70% at YE22. WTFC's cost of total deposits over 2023 rose in line with peers and at 4Q23 sat in the middle of the peer group range. At YE23, WTFC held slightly less cash and liquidity management assets on its balance sheet than at YE22. However, Fitch continues to believe the liquidity profile, including unused borrowing capacity, is adequate and supportive of the rating.
Fitch believes Wintrust's internal reciprocal deposit capability between the 15 operating banks is a competitive advantage over peers with fewer bank charters. This provides additional liquidity flexibility and the ability to offer a cumulative
Government Support Rating: WTFC has a GSR of 'ns'. Fitch believes the probability of support is unlikely. The IDR and Viability Rating (VR) do not incorporate any support.
WTFC's VR is equalized with those of its operating companies and banks, reflecting its role as the bank holding company, which is mandated in the
Additionally, WTFC's holding company VR is equalized with its operating companies' VRs due to sufficient liquidity management. WTFC's common equity double leverage now rests modestly below 120%, further supporting equalization. The affirmation of the holding company VR reflects Fitch's view that WTFC will manage holding company liquidity higher in the near term and maintain levels of liquidity at the holding company to cover upcoming cash outflows.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Negative pressure could be placed on WTFC's ratings and/or Rating Outlook if the company's CET1 were to decline below 8% for several quarters without a credible plan to rebuild back above 8%, particularly in conjunction with rapid loan growth and/or signs of asset quality deterioration.
Asset quality is viewed as a rating strength for WTFC. Evidence of deterioration in asset quality could pressure the ratings. Specifically, should the impaired loans/gross loans ratio rise above 2%, negative rating action would be considered. Moreover, while deterioration in the premium finance line would likely be the result of fraud and/or failed controls, should losses coalesce in this space, negative rating action could be taken.
Fitch notes WTFC's extensive M&A history in the community bank space. While Fitch would consider acquisitions on a case-by-case basis, to the extent WTFC pursues M&A activity that does not fit its current business model and strategy, or materially alters the risk profile, negative rating action could be contemplated.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Over the medium to long term, a Positive Rating Outlook or higher rating could be achieved by consistently performing in line with higher rated peers without altering WTFC's risk appetite. Fitch believes that this would most likely be achieved through consistently strong earnings, evidenced by operating profit to RWA in line with or exceeding peer medians on a sustained basis, as well as continued revenue diversity strength. Furthermore, upward momentum would be contingent on improvement in franchise strength as evidenced by market share gains within the footprint.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Per Fitch's updated 'Bank Rating Criteria,' WTFC's preferred stock rating of 'BB' is notched four levels below WTFC's VR, two notches for loss severity and two notches for nonperformance.
These ratings are in accordance with Fitch's criteria and assessment of the instruments' non-performance and loss severity risk profiles and have been affirmed due to the affirmation of the VR.
Long- and Short-Term Deposit Ratings: The long-term deposit rating of WTFC's bank subsidiaries is rated one notch higher than the bank's IDR and senior unsecured debt because
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Long- and Short-Term Deposit Ratings: The long-term deposit ratings are sensitive to any negative changes to WTFC's Long-Term IDR. WTFC's subsidiaries' short-term deposit rating is sensitive to negative change in the company's long-term deposit rating and Fitch's assessment of WTFC's funding and liquidity profile.
Factors that could, individually or collectively, lead to positive rating action/downgrade:
Long- and Short-Term Deposit Ratings: The long-term deposit ratings are sensitive to any positive changes to WTFC's Long-Term IDR. WTFC's subsidiaries' short-term deposit rating is sensitive to positive change in the company's long-term deposit rating and Fitch's assessment of WTFC's funding and liquidity profile.
WTFC's Government Support Rating is 'No Support'. Fitch believes the probability of support is unlikely.
VR ADJUSTMENTS
The Asset Quality score of 'bbb+' has been assigned below the implied score of 'aa' due to negative adjustments for Growth and Concentrations.
The Funding and Liquidity score of 'bbb+' has been assigned below the implied score of 'a' due to a negative adjustment for Contingent Access.
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.
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