Recently, the long-term Issuer Default Ratings (IDRs) of First Horizon National Corp. (FHN) and its lead bank, First Tennessee Bank, were lowered to 'BBB-' from 'BBB' by Fitch Ratings.
In the midst of a difficult economic environment, concerns related to First Horizon’s prospects have led to this rating downgrade. However, a “Stable” rating outlook has been assigned following the removal of the ratings from Rating Watch Negative.
According to Fitch, First Horizon has adopted steps to modify its strategy and has progressed over the last few years. However, getting back to solid profitability levels has been prolonged, partially on account of tepid economic recovery. Further, subsequent to reporting weak profitability levels compared to its peer group in the last few years, the company is anticipated to report a net loss for the full year 2012.
Notably, the charges incurred in the second quarter of 2012 associated with the expected government sponsored enterprises mortgage repurchase expenses severely impacted First Horizon’s results.
The rating agency opined that persistently low interest rate environment, elevated credit costs mainly stemming from its non-strategic loan portfolio pose a risk for First Horizon’s earnings in the quarters ahead.
While the company enjoyed decent capital ratios compared to its peers previously, they have now come in line with similarly rated banks. This follows its persistent weak earnings, a fall in pace of balance sheet shrinkage as well as recent share repurchases.
However, Fitch expects asset quality to improve, though at a modest pace. This is based on management’s efforts to trim down non-strategic portfolio partly offset by the presence of residential real estate-related troubled debt restructurings that comprised more than half of the company’s nonperforming assets.
Moreover, according to the rating agency, First Horizon’s liquidity profile continued to improve and the company is likely to get regulator’s nod for upstream dividends from its lead bank in the quarters ahead. Given the expectations, the rating agency has confidence in First Horizon’s liquidity profile and anticipates it to well meet its expenditures as upcoming debt matures.
We believe that the ratings are valuable for First Horizon, as they play a major role in preserving investor confidence in the stock and help boost its creditworthiness in the market. So a downgrade is likely to send a short-term negative sentiment.
Further, we believe that shrinking revenue base and regulatory issues, tepid economic recovery along with a low interest rate environment serve as headwinds for the company’s results.
Yet, First Horizon’s endeavor to lower its exposure to problem loans is impressive. It is also aiming at controlling costs and improving long-term profitability by focusing on growing its core Tennessee banking franchise, which would augur well going forward. Moreover, share buybacks boost investors’ confidence in the stock.
First Horizon currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Considering its fundamentals, we have a long-term Neutral recommendation on the stock. One of its closest peers, Cardinal Financial Corp. (CFNL) has a Zacks #1 Rank, implying a short-term Strong Buy recommendation.
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