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Following the merger announcement with TCF Financial TCF, Moody's Investors Service, a rating arm of Moody's Corporation MCO, affirmed all the ratings of Huntington Bancshares Incorporated HBAN. The bank’s long-term senior unsecured debt rating has been affirmed at Baa1. Also, the rating firm’s outlook for the bank has been maintained at “stable”.
Huntington National Bank, the main bank operating entity’s long-term deposit rating has been affirmed at Aa3 and the stand-alone baseline credit assessment (BCA) of a3 has been affirmed.
However, Huntington National Bank's long-term deposit, senior unsecured debt and issuer ratings has been downgraded to negative from stable by the rating firm. Per Moody's, growth in deposits and transformation in the banks' balance sheet due to the recent acquisition might result in reduced unsecured debt on Huntington's balance sheet. Notably, the rating firm considers debt as a main factor in its Loss Given Failure analysis.
Additionally, all long-term ratings of TCF Financial have been placed on review for upgrade by Moody’s. Further, the long-term ratings and assessments, including the baa1 BCA, of the lead bank, TCF National Bank and long-term deposits at A2 are under review. Though the bank’s Prime-2(cr) short-term counterparty risk assessment has been placed under review for upgrade, other short-term ratings were affirmed.
"With the TCF acquisition, Huntington will become one of the largest regional banks in the US, gaining market positions in its key Midwest market and strengthening the banks' national lending businesses" said Rita Sahu, vice president — senior credit officer. "Although the acquisition introduces significant operational and integration risks, we have affirmed Huntington's ratings based on the bank's credit fundamentals and strong acquisition track record," Sahu added.
Rationale Behind Ratings
Per Moody's, the proposed merger with TCF Financial, acquiring significant operational and integration risks, is a large milestone for Huntington with the former’s total assets equalling around 40% of the latter’s assets as of Sep 30, 2020. Notably, both companies have a good track record of integrations in the past.
Nevertheless, prior to the completion of integration, Huntington will have a heightened risk profile as the economic impact of the coronavirus pandemic is not yet certain. Therefore, due to the continued impact of the pandemic leading to uncertain operating conditions, Moody’s might re-evaluate its assessment on the companies’ performance prior to the deal’s closure.
Following the ratings affirmation, Huntington National Bank's long-term deposit, senior unsecured debt and issuer ratings has been downgraded to negative from stable by the rating firm. Per Moody's, growth in deposits and transformation in the banks' balance sheet due to the recent acquisition might result in reduced unsecured debt on Huntington's balance sheet. Notably, the rating firm considers debt as a main factor in its Loss Given Failure analysis.
Moreover, TCF Financial's ratings under review for upgrade indicate Moody’s belief of creditors getting benefit from the merger. TCF Financial's BCA reflects solid balance sheet, including huge low-cost funding base, enhanced liquidity, stable asset quality and sufficient capitalization. Furthermore, the bank recorded profits despite margin pressure and increased expenses associated with the merger between TCF Financial and Chemical in August 2019.
Notably, the review is likely to conclude on the deal’s closure expected in the second quarter of 2021after getting all regulatory approvals.
Factors Behind an Upgrade or Downgrade of The Ratings
For Huntington, ratings could be upgraded on enhanced capitalization or rise in levels of profitability compared with peers, along with improved market funding and liquid assets. However, a downgrade is possible due to certain factors, including unsuccessful integration with TCF Financial, significant rise in problems loans or credit losses, and weak underwriting standards.
For TCF Financial, Moody's is focused on the benefits to creditors of the proposed merger under review for upgrade.
Currently, both Huntington and TCF Financial carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. A worth-considering stock includes Bank OZK OZK, which currently sports a Zacks Rank #1, and has witnessed upward revisions over the last 60 days.
Notably, shares of Huntington and TCF Financial have rallied 21.7% and 11.4%, respectively, over the last six months.
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Moodys Corporation (MCO) : Free Stock Analysis Report
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Bank OZK (OZK) : Free Stock Analysis Report
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