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Cullen/Frost (CFR) Ratings and Outlook Maintained by Moody's

Zacks Equity Research
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Cullen/Frost Bankers, Inc.’s CFR and its subsidiary, Frost bank’s ratings have been reiterated by Moody’s Investors Service, the rating arm of Moody’s Corporation MCO. Further, the rating agency has maintained the company’s outlook at ‘stable’.       

Cullen/Frost Bankers’ long-term issuer and subordinate debt rating has been affirmed at A3, while preferred stock non-cumulative rating has been maintained at Baa2 (hyb). Frost Bank has been rated Aa3 and  Prime-1 for long-term and short-term deposits, while its standalone baseline credit assessment and counterparty risk assessments have been maintained at a2 and A1(cr)/Prime-1(cr), respectively.

Per Moody’s, the latest ratings and outlook reiteration highlights the company’s robust liquidity and asset quality, better profitability and capitalization, as well as concentration of wholesale banking in Texas. This is expected to continue in future as well.

Rationale behind the Affirmation

Per Moody’s, Cullen/Frost Bankers has a stable net income ratio, supported by decent fee revenues and low credit costs. Also, rate hikes and declining taxes have enhanced the company’s profitability in recent years. Furthermore, its net income ratio compares favorably with that of its peers, indicating solid earnings.

Higher contributions from retained earnings and average shareholder payouts have resulted in a better capital position of the company. Moody’s tangible common equity (TCE), as a percentage of risk-weighted assets (Moody's TCE ratio), for the company increased from 11.05% as of Dec 31, 2015, to 12.45% as of Mar 31, 2018.

Cullen/Frost Bankers’ core deposit funding stood at $26.9 billion as of Mar 31, 2018. The figure, which is double the size of the company’s loan balance, helps in reducing its reliance on market funds. Combined with other liquid assets, its securities portfolio equals to around half the company’s tangible banking assets. State and local municipal bonds of high credit quality, constitute 62% of its 10.7 billion available-for-sale securities portfolio. This reflects the company’s solid liquidity position.

However, asset concentration remains a concern for Cullen/Frost. Its commercial banking portfolio is concentrated in Texas and half of the loan portfolio comprises large loans (>$10 million). In addition, the company’s energy loans constitute almost 61% of Moody’s adjusted TCE as of Jun 30, 2018, plunging from 91% as of Dec 31, 2015. Nonetheless, its energy portfolio has performed better compared to its peers despite the recent turmoil in the energy industry.

What Could Make Moody's Change the Ratings?

Cullen/Frost Bankers’ ratings can be revised higher, backed by the reduction of concentration risk in its energy portfolio, large loans or commercial loans. A better capital position and profitability, along with robust core-deposit funding and liquid balance sheet, will also likely lead to upward revision in ratings.

Nevertheless, the company’s ratings can be downgraded if its capital or liquidity position, or credit-risk appetite becomes weak.

Shares of Cullen/Frost Bankers have gained 19.1% year to date, outperforming the 0.7% rally of the industry it belongs to.

Currently, the stock carries a Zacks Rank #3 (Hold).

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