CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the long-term Issuer Default Ratings (IDR) and Viability Rating (VR) of CVB Financial Corp. (CVBF) and its primary bank subsidiary, Citizens Business Bank, at 'BBB'. The Rating Outlook remains Stable. A complete list of ratings is provided at the end of this release.
KEY RATING DRIVERS - IDRS, VRs AND SENIOR DEBT
The affirmation of CVBF's ratings reflects its continued steady operating performance coming out of the financial crisis, its solid, albeit spread-reliant core earnings and stable asset quality over recent periods.
CVBF's earnings remain among the highest and most consistent within the community bank peer group as well as in Fitch's rating universe. The company's ROA over the past five quarters has averaged nearly 1.54%, driven by a fairly stable net interest margin (NIM), good cost controls and material reserve releases.
Fitch observes that reserve releases and reverse provisions have made up nearly 16% of pre-tax income over the same time period. Given the company's low loss history relating to nonperforming assets (NPAs) as well as current reserve levels, Fitch anticipates that it will continue to release reserves over the near-to-medium term. Fitch notes that more core earnings measures such as pre-provision net revenues remain above peer and industry averages as well.
Even with consistent and high earnings, Fitch views CVBF's earning profile as a rating constraint as the company continues to primarily rely on spread income. Net interest income for the first half of 2014 accounted for around 88% of core revenue, compared to the community bank average of between 70%-75%. This presents an elevated risk of earnings deterioration in the event of material NIM compression.
Fitch also continues to believe that CVBF's ratings remain constrained by asset type and geographic concentrations. Loans secured by commercial real estate (CRE) represent approximately 65% of total loans and are largely concentrated in California's Los Angeles County, Central Valley and the Inland Empire, three areas that were particularly hit hard during the financial downturn. Similar to others in the community bank peer group, Fitch believes that CVBF's concentrations make the company susceptible to idiosyncratic risks and disproportional amounts of credit volatility.
Fitch views CVBF's general risk appetite as a ratings strength and a product of conservative management practices. Fitch views the company's underwriting standards as relatively above average when considering the asset class and geographic concentration inherent in its balance sheet. This is evidenced by CVBF's level of net chargeoffs (NCOs) through the last economic cycle. Fitch observes that on average, CVBF's NCOs have consistently lagged the industry over the past 25 quarters.
Even with this low level of NCOs, CVBF's level of NPAs remain elevated relative to similarly rated banks. CVBF's NPA ratio of 3.41% is the highest in the community bank peer group but continues to improve. At the second quarter of 2014 (2Q'14), CVBF's accruing troubled debt restructurings (TDRs), which totaled $62 million, added approximately 180 basis points (bps) to the NPA ratio. CVBF's balance of TDRs as a percentage of total NPAs is among the highest among the community banks at over 50%. Fitch attributes part of this to CVBF's conservatism in not only recognizing TDRs but also making sure a commercial credit has been cured under current market terms and conditions before taking it off TDR status. Therefore, Fitch expects NPAs to remain elevated versus similarly rated peers while the credit costs remained relatively lower. Fitch believes early recognition of troubled credits will likely lead to more favorable credit workout outcomes.
CVBF's liquidity and funding profile remain solid. The company consistently manages its loan-to-deposit ratio in line with the community bank peer group median which typically falls between 70% and 80%. Fitch considers CVBF's ability to attract high-quality, low-cost deposits as a core competency and a ratings strength. Core deposits account for nearly 90% of total deposits.
Capital and reserves are likewise strong relative to the community bank peer group and similarly rated peers. As noted above, healthy reserve levels representing 1.75% of non-covered loans are likely to come down over the next year as the company's recent NCO experience on non covered loans (2 bps recovery annualized through 2Q'14) will put favorable pressure on reserve levels into 2015, provided economic conditions allow. Fitch anticipates that this will further strengthen CVBF's capital position that already boasts a strong Fitch Core capital to total assets ratio of 10.3%.
RATING SENSITIVITIES - IDRS, VRs AND SENIOR DEBT
Fitch believes there is limited upside rating momentum over the intermediate term given the bank's asset and geographic concentrations along with its earnings profile. However, better portfolio and business diversity could have positive implications provided the company maintains its conservative risk management practices.
Although not expected, negative rating pressures could result if improvements in credit trends reverse, particularly if additional large loans become impaired. Moreover, if capital management were to become more aggressive in payout levels or through acquisitions, negative rating action could ensue.
KEY RATING DRIVERS - LONG- AND SHORT-TERM DEPOSIT RATINGS
CVBF's uninsured deposit ratings at the subsidiary banks are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.
KEY RATING SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS
The ratings of long- and short-term deposits issued by the trust banks and its subsidiaries are primarily sensitive to any change in the company's IDR. This means that should a long-term IDR be downgraded, deposit ratings could be similarly impacted.
KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
CVBF's other hybrid securities rating are notched below its VR of 'bbb' in accordance with Fitch's assessment of the instruments non-performance and loss severity risk profiles.
KEY RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings of other hybrid securities are sensitive to any change in the company's VR.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
CVBF has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, CVBF is not systemically important and therefore, the probability of support is unlikely. The IDRs and VRs do not incorporate any support.
RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
CVBF's Support Rating and Support Rating Floor are sensitive to Fitch's assumption around capacity to procure extraordinary support in case of need.
KEY RATING DRIVERS - HOLDING COMPANY
The IDR and VR of CVBF is equalized with its operating company, Citizens Business Bank, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries.
KEY RATING SENSITIVITIES - HOLDING COMPANY
If CVBF became undercapitalized or increased double leverage significantly there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies.
The following ratings have been affirmed with a Stable Outlook:
CVB Financial Corp.
--Long-term Issuer Default Rating (IDR) at 'BBB';
--Short-term IDR at 'F2';
--Viability Rating at 'bbb';
--Support at floor 'NF';
--Support at '5'.
Citizens Business Bank
--Long-term IDR at 'BBB';
--Long-term deposit at 'BBB+';
--Short-term IDR at 'F2';
--Short-term deposit at 'F2';
--Viability Rating at 'bbb';
--Support floor at 'NF';
--Support at '5'.
CVB Statutory Trust III
--Preferred stock at 'BB-'.
Additional information is available at www.fitchratings.com.
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.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);
--'Assessing and Rating Bank Subordinated and Hybrid Securities Criteria' (Jan. 31, 2014);
--'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles' (March 27, 2014);
--'U.S. Banking Quarterly Comment: 2Q14' (July 23, 2014);
--'U.S. Banks: Liquidity and Deposit Funding (Diminishing QE Effectiveness and its Impact on Systemic Liquidity and Funding)' (Aug. 8, 2013);
--'U.S. Bank Mergers and Acquisitions' -- When Will The Catalysts Kick In?' (July 11, 2013);
--'U.S. Banks: Interest Rate Risks (What Happens When Rates Rise)' (June 18, 2013);
--'U.S. Banks: Home Equity Reset Risk Hitting the Reset Button in 2014' (April 29, 2013);
--'U.S. Banks: Rationalizing the Branch Network (Witness the Incredible Shrinking Branch Network)' (Sept. 17, 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);
--'Risk Radar' (Sept. 15, 2014).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397
Rating FI Subsidiaries and Holding Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209
Assessing and Rating Bank Subordinated and Hybrid Securities Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137
U.S. Bank HoldCos & OpCos: Evolving Risk Profiles
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742096
U.S. Banking Quarterly Comment: 2Q14 (Environment Constraining Earnings)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753107
U.S. Banks: Liquidity and Deposit Funding
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714196
U.S. Bank Mergers and Acquisitions -- When Will The Catalysts Kick In?
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=712539
U.S. Banks: Interest Rate Risks (What Happens When Rates Rise)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710875
U.S. Banks -- Home Equity Reset Risk Hitting the Reset Button in 2014
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=706915
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
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
Risk Radar Global 3Q14
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=773568
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=878874
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