NEW YORK--(BUSINESS WIRE)--Fitch Ratings has completed a peer review of the following companies: Astoria Financial Corporation (AF), CapitalSource Inc. (CSE), Dime Community Bancshares, Inc. (DCOM), Emigrant Bancorp, Inc. (EMIG), and New York Community Bancorp, Inc. (NYCB). These companies are part of Fitch's niche peer group.
Fitch's niche group is composed of banks with total assets ranging from $4 billion to $44 billion. Issuer Default Ratings (IDRs) for this group are relatively dispersed with a low of 'B-' to a high of 'BBB+'. Niche banks typically employ focused strategies with limited product offerings and limited revenue diversification. Additionally, the niche banks generally have smaller deposit franchises than a traditional bank. As a result, niche banks have higher loan-to-deposit ratios and elevated funding costs. Conversely, the niche banks will have lower overhead costs by having fewer brick and mortar retail branches.
Niche bank earnings remained relatively flat year over year despite significant net interest margin (NIM) compression. Earnings were supported via reserve releases and securities gains. The median NIM declined by 44bps year over year. Typically, niche banks experience greater NIM volatility than traditional commercial bank franchises due to a niche bank's smaller deposit franchise. As a result, niche banks are more reliant on wholesale funding which is more rate sensitive.
For the most part, niche banks have enjoyed fairly good asset quality as credit cost remained manageable through the cycle. Given the concentrated product offerings by the niche banks, underwriting is typically more conservative than a diversified commercial bank.
RATING ACTION AND RATIONALE
Astoria Financial Corporation (AF)
AF's long- and short-term IDRs were affirmed at 'BBB-/F3'. The Rating Outlook remains Stable. This reflects growing capital levels and solid asset quality metrics as reflected by low credit costs through the cycle. Both NPAs and NCOs declined year over year in line with Fitch's expectations. AF's ratings strength is balanced against a weak funding profile and profitability levels that lag its rated peers. The Stable Outlook incorporates Fitch's view that earnings will continue to struggle in the upcoming year while NPAs decline and capital levels continue to grow.
CapitalSource, Inc. (CSE)
CSE's long-term IDR was affirmed at 'BB' and the Rating Outlook remains Stable. This reflects improved operating performance and the impact of reserve releases as asset quality continues to improve. Liquidity has strengthened due to the repayment of parent company debt and capital ratios are solid for the rating category. The IDRs of CSE and CapitalSource Bank (CSB) were equalized last year, reflecting the reduction of parent company debt (see Fitch's press release titled 'Fitch Upgrades CapitalSource Inc., Affirms CapitalSource Bank; Outlook Remains Stable' on April 13, 2012).
The affirmation of CSB's ratings reflects sufficient liquidity and solid capitalization relative to its rating level, offset by unseasoned loan performance of new bank originations, reliance on spread income, and a rate sensitive deposit base. Fitch believes CSB's planned charter conversion and CSE's bank holding company application will likely to be completed in 2013. Although not anticipated, Fitch would view negatively a withdrawal or failure to execute on the planned charter conversion.
Dime Community Bancshares, Inc. (DCOM)
DCOM's long and short-term IDRs were affirmed at 'BBB/F2' The Rating Outlook remains Stable. This affirmation reflects DCOM's strong track record implementing its focused multifamily lending strategy in the New York City area as well as its solid earnings and asset quality. These strengths are balanced against DCOM's undiversified earnings profile, relatively higher risk funding profile and modest franchise. The Stable Outlook reflects Fitch's view that Dimes' strategy will remain relatively unchanged in the near term and NPAs will decline, albeit at a very moderated pace.
Emigrant Bancorp, Inc. (EMIG)
EMIG's long-term IDR was upgraded to 'B' from 'B-'; the Outlook remains Stable. The upgrade reflects both the continued improvement of asset quality metrics as well as the additional capital provided by the sale of its branch network. Fitch recognizes that the branch sale does not constitute core earnings, and that core profitability remains a weakness for the company. That said, the branch sale provides additional flexibility to deal with its 2014 senior debt maturities as well as outstanding TARP. Emigrant's rating strengths are balanced against the company's elevated NPA levels, evolving business initiatives and 'key man' risk in the form of the company's chairman and CEO, Howard Milstein. That being said, the Milstein family has contributed a significant amount of capital to the bank over the last few years. The Stable Outlook reflects Fitch's expectation that EMIG will continue to gradually reduce NPA levels while increasing core earnings in the near term.
New York Community Bancorp, Inc. (NYCB)
NYCB's long and short-term IDRs were affirmed at 'BBB+/F2'; the Outlook remains Stable. This affirmation reflects NYCB's strong track record implementing its focused multifamily lending strategy in the New York City area as well as its solid asset quality. NYCB's ratings are balanced against a limited franchise and relatively undiversified earnings profile. NYCB's Stable Outlook reflects Fitch's view that NPAs will continue to decline while margin compression pressures earnings in the near term.
RATING DRIVERS AND SENSITIVITIES
Astoria Financial Corporation (AF)
In the intermediate term, Fitch views interest rate risk and profitability as AF's biggest challenge. AF actively manages interest rate risk by procuring term funding to limit its interest rate risk. That said, low rates and AFs limited residential offering of 5/1 and 7/1 hybrid ARMs and fixed 15-year loans provide limited ability to grow margins or profitability. To combat margin pressure, AF re-entered the competitive multi-family market in New York, which currently offers higher yields than residential mortgages.
Asset quality is a rating strength for the institution. AFs' residential portfolio performed relatively well throughout the credit cycle. NCOs peaked at a relatively low 77bps in 2009. At year-end 2012, NCOs remained low at 0.37%. NPAs, while higher than historical levels, are manageable at 2.98% at the end of 2012. Fitch expects credit cost to remain low while NPAs are expected to continue its slow decline as the judicial foreclosure process limits the speed at which lenders can resolve problem residential mortgages in New York, New Jersey and Illinois.
Fitch believes positive rating action is unlikely in the near term given Fitch's expectation of near-term earnings and margin pressures. Negative ratings actions would likely result if asset quality or capital decline materially. Additionally, uncontrolled growth in the multi-family market could result in negative ratings pressure.
CapitalSource, Inc. (CSE)
Fitch views favorably the overall improvement in asset quality. However, there is risk related to the unseasoned performance of recent bank originations as the bank loan portfolio has grown a cumulative 49% over the last two years. Fitch notes that weakness or deterioration in the bank portfolio beyond existing reserve and capital levels may have an adverse effect on CapitalSource Bank (CSB) performance and possibly generate negative ratings momentum. In addition, liquidation of the remaining legacy loan book remains a risk, though to a lesser degree than years past.
Loans in the parent company legacy portfolio continue to run-off, declining to $526 million at year-end 2012 versus $972 million at year-end 2011 and represented less than 9% of the consolidated loan portfolio. The declining legacy loan portfolio has contributed to the overall improvement in asset quality metrics in 2012, as NPAs and NCOs continued to decrease year over year. Consolidated NPAs at the end of 2012 were 2.1% of average loans compared to 5.3% the previous year end. Fitch notes that the 2012 charges-offs primarily reflect write-offs in the legacy portfolio, and the agency expects a further decrease in NCO levels in 2013 as the legacy portfolio continues to shrink. Cumulative NCOs, as a percentage of average loans for the total portfolio were 1.3%, while NCOs at the bank level were 0.20% at year-end 2012.
In 2012, CSE returned to profitability and operating performance benefited from improved NIM and lower loan loss provisioning. Consolidated pre-tax income was $205.5 million in 2012 compared to a pre-tax loss of $15 million in 2011. The adjusted return on assets (ROA) in 2012, which excludes the $347 million impact of the reversal of a net deferred tax valuation allowance, was 1.70% and compares favorably to peers. While Operating performance has improved, but Fitch expects performance in 2013 to be constrained by pressure on NIM as investment and loan yields continue to contract. Further contraction in NIM beyond current expectations and negatively affecting operating performance may yield negative ratings momentum. Nonetheless, Fitch believes any decline in performance would likely be in line with industry averages.
Fitch believes the company's funding profile to be somewhat limited since its deposit base is primarily comprised of retail time deposits, which are generally rate-sensitive and shorter-term relative to its loan book. Fitch believes CSB will gain additional funding flexibility over the medium-to-longer term once the planned charter conversion and holding company application has been approved by its regulators. However, should the application and approval not take place, CSB's ratings will remain constrained due to the narrow and rate-sensitive nature of is funding base.
CSB's capital base is solid and of good quality relative to similarly rated peers. Fitch believes a capital base of CSB's current size to be appropriate given the specialty nature of the company's current portfolio and residual asset quality concerns related to its remaining legacy loan portfolio. At Dec. 31, 2012, CSB had Tier 1 leverage, Tier 1 risk-based capital and total risk based capital ratios of 13.06%, 15.24% and 16.50%, respectively. Over the long term, CSB plans to manage total risk based capital between 15.5% and 16%, which Fitch believes is appropriate for its current ratings
Fitch believes positive rating momentum is limited over the near- to medium-term due to CSE's limited funding profile as an industrial bank and uncertainty related to the company's planned bank charter conversion. In addition, the asset quality of new loans bears monitoring and remains a near-term constraint as CSB has experienced rapid loan growth in recent years. However, positive rating momentum could develop over time with improved funding flexibility from longer-term deposits post-charter conversion, combined with consistent earnings generation and solid asset quality performance could also be viewed positively by Fitch.
Conversely, negative rating actions could result from weakness or deterioration in asset quality performance on the underlying portfolio beyond existing reserve and capital levels, a decline in CSB's competitive positioning and inability to grow originations, or further compression of net interest margins beyond expectations resulting in negative operating performance. In addition, a reduction of liquidity relative to outstanding debt and/or significant reductions in capital levels could also yield negative rating actions.
Dime Community Bancshares, Inc. (DCOM)
Asset quality is a ratings strength for the institution. Both NPAs and NCOs remain low at DCOM, owing to the bank's ability to execute its core strategy of rent-regulated, multi-family lending predominantly in DCOM's core market in New York City. While NPAs are higher than historical levels, asset quality metrics compare favorably to its rated peers.
ROA declined from 1.15% to 1.01% in 2012 due to declining margins. Reported earnings are somewhat volatile due to unplanned prepayment income which can vary quarter to quarter. Fitch generally expects earning will continued to be pressured in the low rate environment.
Fitch believes DCOM's ratings are solidly situated at current levels. Further ratings improvement is unlikely given the meaningful concentrations in the loan portfolio and undiversified earnings profile. Negative ratings pressure could occur if there were a significant change to rent regulations in New York, a sharp increase in problem loans or a significant loss of business from any of DCOM's main commercial real estate brokers. Additionally, although not anticipated, any significant changes in the mix of business, either by product type or geography, would be carefully considered by Fitch to determine any potential ratings impact.
Emigrant Bancorp, Inc. (EMIG)
Asset quality metrics are improving, but NPAs remain stubbornly high. NPAs are driven primarily by EMIG's residential portfolio. Fitch expects NPAs to remain elevated as the judicial foreclosure process limits the speed at which lenders can resolve problem residential mortgages in New York. That said, credit losses for this portfolio have remained manageable as most of the mortgages have relatively low loan-to-values (LTVs).
As the economic environment worsened during the credit cycle, EMIG shifted its focus to commercial lending through a number of different channels. EMIG offers a number of different commercial lending products including fine arts lending, sports lending, CRE bridge loans and private equity-sponsored cash flow loans. Additionally, EMIG participates in the syndicated loan market. Each of these lending channels has limited exposure on its own, but collectively they represent a nearly one-fourth of the loan portfolio. Any deterioration in these portfolios could result in negative ratings pressure.
Core earnings continue to struggle at EMIG, but the branch sale is expected to reduce overhead costs and be net-additive to core earnings in the near term. Fitch expects that the low interest rate environment will keep putting pressure on earnings and margins for the foreseeable future. To combat margin pressures, Emigrant has placed strategic focus on building up its fee income businesses. These businesses include HPM Partners (investment advisor/wealth management), Personal Risk Management (insurance brokerage), NYPB&T (wealth management and trust services) and Galatioto Sports Partners (sports M&A advisory boutique), and Fiduciary Network. Fitch expects that the bank's fee income businesses will likely take some time to add meaningful incremental earnings growth given the deep relationships needed in private banking and wealth management.
Given elevated NPAs and evolving business initiatives, Fitch expects the company will operate with elevated tangible capital ratios. Any meaningful reduction to tangible capital levels in the near term could place negative pressure on its current ratings. Additionally, any deterioration to asset quality metrics could result in a ratings downgrade. Conversely, positive ratings action could occur if core earnings improve, asset quality strengthens and new business reach scale in terms of profitability.
Fitch continues to rate the holding company one notch below its bank subsidiaries due to forthcoming maturity of $200 million of senior notes in June 2014. Emigrant's parent, New York Private Bank & Trust (NYPBT), also has $276 million of preferred stock outstanding under the TARP. The interest rates on EMIG's TARP shares are scheduled to step up to a 9% coupon from 5% in 2014. The rating of the holding company would likely be equalized with the bank once these obligations are addressed.
New York Community Bancorp, Inc. (NYCB)
NYCB's current ratings reflect its very favorable credit loss experience over multiple credit cycles. Through the current cycle, NCOs peaked at 35bps and totaled just 13bps in 2012. Low losses are attributable to NYCB's ability to execute its core strategy of rent-regulated, multi-family lending predominantly in NYCB's core market in New York City.
Earnings performance is solid. NYCB's ROA of 1.18% compares favorably with the niche bank group. NYCB's profitability is a function of low credit costs, low overhead expenses, prepayment income and mortgage banking fees, as well as a balance sheet which has a greater percentage of loans than most banks. Fitch expects NYCB's profitability to face headwinds in 2013 as the low rate environment and increasing competition for multi-family loans pressures NIMs. While Fitch believes the quality of the mortgage banking income and prepayment fees is generally weaker than the core multi-family business, they do provide some degree of earnings diversity.
Fitch believes NYCB's ratings are solidly situated at current levels. NYCB has limited ability to achieve ratings improvement given its concentration to asset classes, geographies and single-name borrowers. Further, NYCB's limited franchise and funding profile also make positive ratings action unlikely in the near term.
Conversely, NYCB's ratings are highly sensitive to the multifamily market in the New York City area. Loosening of rent-regulations in the New York area could be a negative rating driver for the institution. Additionally, aggressive capital management or any deterioration of asset quality metrics could also result in negative ratings pressure.
NYCB continues to eye potential large accretive acquisitions; Fitch would view such transactions with caution. Although NYCB has demonstrated the ability to integrate many institutions in the past, large acquisitions will require commensurate enhancements to risk management and will likely make NYCB a systemically important financial institution under Dodd-Frank.
KEY RATING DRIVERS - Support and Support Rating Floors
Niche banks have a Support Ratings of '5' and Support Rating Floors of 'NF'. Fitch believes that they are not systemically important and therefore, the probability of support is unlikely. The IDRs and Viability ratings (VRs) do not incorporate any external support.
RATING SENSITIVITIES - Support and Support Rating Floors
Fitch does not anticipate changes to the Support Ratings or Support Rating Floors given size and the lack of systemic importance of the niche bank group.
KEY RATING DRIVERS - Subordinated Debt and Other Hybrid Securities:
Subordinated debt and other hybrid capital issued by the trust banks and by various issuing vehicles are all notched down from the holding company or its bank subsidiaries' VRs in accordance with Fitch's assessment of each instrument's respective nonperformance and relative loss severity risk profiles.
RATING SENSITIVITIES - Subordinated Debt and Other Hybrid Securities:
Ratings are primarily sensitive to any change in the VRs, where the notching would be realigned in conjunction with any change in the VR.
KEY RATING DRIVERS - Subsidiary and Affiliated Company Rating:
The IDRs and VRs of AF, CSE, DCOM and NYCB are core to each company's business and therefore IDRs and VRs are equalized across the group. Fitch continues to rate EMIG one notch below its Emigrant Bank subsidiary due to forthcoming maturity of $200 million of senior notes in June 2014 in addition to outstanding TARP monies from the U.S. department of treasury.
RATING SENSITIVITIES - Subsidiary and Affiliated Company Rating:
Ratings are primarily sensitive to any change in the VRs of the associated bank subsidiaries
Fitch has upgraded the following ratings with a Stable Outlook.
Emigrant Bancorp Inc:
--Long-term IDR to 'B' from 'B-',
--Viability Rating to 'b' from 'b-'.
Emigrant Bank
--Long-term IDR to 'B+' from 'B',
--Viability Rating to 'b+' from 'b';
--Long-term Deposits to 'BB- ' from 'B+/RR3'.
Emigrant Mercantile Bank
--Long-term IDR to 'B+' from 'B'.
Fitch has affirmed the following ratings:
Emigrant Bancorp Inc:
--Short-Term IDR at 'B'
--Senior Debt at 'CCC/RR6';
--Support at '5';
--Support Floor at 'NF'.
Emigrant Bank
--Short-Term IDR at 'B';
--Short-Term Deposits at 'B';
--Support at '5';
--Support Floor at 'NF'.
Emigrant Mercantile Bank
--Short-Term IDR at 'B';
--Support at '5';
--Support Floor at 'NF'.
Emigrant Capital Trust I
Emigrant Capital Trust II
--Preferred Stock at 'CC/RR6'.
Following the merger into Emigrant Bank, Fitch has withdrawn the ratings for the following:
Emigrant Savings Bank - Bronx/Westchester
--Long-term IDR at 'B',
--Viability Rating at 'b';
--Long-term Deposits at 'B+/RR3';
--Short-Term IDR at 'B';
--Short-Term Deposits at 'B';
--Support at '5';
--Support Floor at 'NF'.
Emigrant Savings Bank - Brooklyn/Queens
--Long-term IDR at 'B',
--Viability Rating at 'b';
--Long-term Deposits at 'B+/RR3';
--Short-Term IDR at 'B';
--Short-Term Deposits at 'B';
--Support at '5';
--Support Floor at 'NF'.
Emigrant Savings Bank - Manhattan
--Long-term at 'B',
--Viability Rating at 'b';
--Long-term Deposits at 'B+/RR3';
--Short-Term IDR at 'B';
--Short-Term Deposits at 'B';
--Support at '5';
--Support Floor at 'NF'.
Emigrant Savings Bank - Long Island
--Long-term IDR at 'B',
--Viability Rating at 'b';
--Long-term Deposits at 'B+/RR3';
--Short-Term IDR at 'B';
--Short-Term Deposits at 'B';
--Support at '5';
--Support Floor at 'NF'.
Fitch has affirmed the following ratings with a Stable Outlook:
Astoria Financial Corp.
--Long-Term IDR at 'BBB-';
--Short-Term IDR at 'F3';
--Viability rating at 'bbb-';
--Senior unsecured at 'BBB-';
--Support at '5';
--Support Floor at 'NF'.
--Preferred Stock at 'B'.
Astoria Federal Savings & Loan
--Long-Term IDR at 'BBB-'
--Long-term Deposits at 'BBB';
--Short-Term IDR at 'F3';
--Viability rating at 'bbb-'.
--Short-Term Deposits at 'F2';
--Support at '5';
--Support Floor at 'NF'.
Astoria Capital Trust I
--Preferred stock at 'B+'.
CapitalSource Inc.
--Long-term IDR at 'BB'.
CapitalSource Bank
--Long-term IDR at 'BB';
--Short-term IDR at 'B;.
--Viability Rating at 'bb';
--Support at '5';
--Support Floor at 'NF';
--Short-term deposits at 'B';
--Long-term deposits at 'BB+'.
Dime Community Bancshares, Inc.
--Long-term IDR at 'BBB';
--Short-term IDR at 'F2';
--Viability rating at 'bbb';
--Support at '5';
--Support Floor at 'NF'.
Dime Savings Bank of Williamsburgh
--Long-term IDR at 'BBB';
--Long-term Deposits at 'BBB+';
--Short-Term IDR at 'F2';
--Short-Term Deposits at 'F2';
--Viability rating at 'bbb'.
--Support at '5';
--Support Floor at 'NF'.
Dime Community Capital Trust I
--Trust Preferred at 'BB-'.
New York Community Bancorp
--Long-term IDR at 'BBB+';
--Viability rating at 'bbb+';
--Short-term IDR at 'F2';
--Support at '5';
--Support floor at 'NF'.
New York Community Bank
--Long-term IDR at 'BBB+';
--Long-term deposits at 'A-';
--Viability rating at 'bbb+';
--Short-term IDR at 'F2';
--Support at '5';
--Support floor at 'NF';
--Short-term deposits at 'F2'.
New York Commercial Bank
--Long-term IDR at 'BBB+';
--Long-term deposits at 'A-';
--Viability rating at 'bbb+'.
--Short-term IDR at 'F2';
--Support at '5';
--Support floor at 'NF';
--Short-Term deposits at 'F2'.
Richmond County Capital Corporation
--Preferred stock at 'BB-'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the source(s) of information identified in Fitch's Master Criteria, these actions were additionally informed by information provided by the companies. Note: Dime Community Bancshares, Inc (DCOM); The issuer did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.
Applicable Criteria and Related Research:
--'Risk Radar' (Apr. 04, 2013)
--U.S. Banking Quarterly Comment (Feb. 21, 2013)
--U.S. Housing Finance GSEs: Where to from Here (Feb. 28, 2013)
--'U.S. Banks: Rationalizing the Branch Network (Witness the Incredible Shrinking Branch Network)' (Sept. 17, 2012)
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);
--'Treatment of Unrealized Losses in U.S. Bank Capital Rule Proposal (Pro-Cyclical Capital Policy to Create Greater Capital Volatility for Banks)' (Aug. 7, 2012);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);
--'Assessing and Rating Bank Subordinated and Hybrid Securities' (Dec. 05, 2012);
--Recovery Ratings for Financial Institutions (Aug. 12, 2012)
Applicable Criteria and Related Research
Recovery Ratings for Financial Institutions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686295
Assessing and Rating Bank Subordinated and Hybrid Securities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695542
Rating FI Subsidiaries and Holding Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209
Treatment of Unrealized Losses in U.S. Bank Capital Rule Proposal (Pro-Cyclical Capital Policy to Create Greater Capital Volatility for Banks)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685638
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181
U.S. Banks: Rationalizing the Branch Network (Witness the Incredible Shrinking Branch Network)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688330
U.S. Housing Finance GSEs: Where to from Here
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700032
U.S. Banking Quarterly Comment: 4Q12
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=701972
Risk Radar Update
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=699014
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