Concluding the review started in Oct 2013, Moody’s Investors Service, the credit rating wing of Moody’s Corporation (MCO), has slashed the long-term ratings of City National Corporation (CYN) and its operating subsidiary, City National Bank.
The credit rating agency downgraded the long-term senior unsecured and issuer ratings of City National to “A3” from “A2.” Concurrently, the bank financial strength rating (:BFSR)/baseline credit assessment (BCA) rating and the long-term deposit rating of City National Bank was downgraded to “C+/a2” from “B-/a1” and “A2” from “A1,” respectively. All the ratings carried a stable outlook.
The downgrade was led by mounting pressure on the company's profitability due to a low interest rate environment. Being highly reliant on net interest income, lower net interest margin and fee revenue pressures are likely to weigh on City National’s pre-tax, pre-provision profits. Also, the company is restricted by its low cost deposit base and low levels of market funding.
As a result, City National has limited ability to counter the revenue pressures. Moody’s expects the company to witness more pressure on revenue generation going forward as a result of lower interest income from the divestiture of the FDIC-covered loan portfolio. Expense reduction is not expected to favor up margins.
Moreover, a moderate capital position also accounts for the ratings demotion. Nevertheless, Moody’s recognized that the capital position of the company positions it favorably to counter credit losses in an adverse economic condition.
Additionally, Moody’s is of the opinion that although the ratings are downgraded, they still remain above the ratings of other U.S. banks owing to balance sheet maintenance, high core deposit funding and above-average asset quality that is driven by its residential mortgage and home equity portfolio (representing one-third of the total loans).
Nevertheless, ratings downgrade from credit rating agencies dampens the creditworthiness of a company in the market and affects investor confidence in the stock.
City national currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same sector include Preferred Bank (PFBC) and Sierra Bancorp (BSRR). Both the stocks carry a Zacks Rank #1 (Strong Buy).