Rating Action: Moody's affirms Signature Bank's ratings and changes outlook to negative; assigns Ba1(hyb) to preferred stock
Global Credit Research - 10 Dec 2020
New York, December 10, 2020 -- Moody's Investors Service, ("Moody's") has affirmed the ratings of Signature Bank, which has a standalone Baseline Credit Assessment (BCA) of baa1, long- and short-term deposit ratings of A2/Prime-1, and a long-term issuer rating of Baa2. Its counterparty risk ratings (local and foreign currency) are Baa1/Prime-2. The rating outlook was changed to negative from stable. In the same action, Moody's assigned a Ba1(hyb) rating to Signature Bank's non-cumulative perpetual preferred stock.
Assignments: ..Issuer: Signature Bank
....Pref. Stock Non-cumulative, Assigned Ba1(hyb)
..Issuer: Signature Bank
....Adjusted Baseline Credit Assessment, Affirmed baa1
....Baseline Credit Assessment, Affirmed baa1
....LT Counterparty Risk Assessment, Affirmed A3(cr)
....ST Counterparty Risk Assessment, Affirmed P-2(cr)
....LT Counterparty Risk Rating (Local Currency), Affirmed Baa1
....ST Counterparty Risk Rating (Local Currency), Affirmed P-2
....LT Counterparty Risk Rating (Foreign Currency), Affirmed Baa1
....ST Counterparty Risk Rating (Foreign Currency), Affirmed P-2
....LT Issuer Rating, Affirmed Baa2, Negative from Stable
....Subordinate Regular Bond/Debenture, Affirmed Baa2
....LT Bank Deposits, Affirmed A2, Negative from Stable
....ST Bank Deposits, Affirmed P-1
..Issuer: Signature Bank
....Outlook, Changed to Negative from Stable
The affirmation of Signature Bank's baa1 BCA reflects its strong balance sheet characterized by solid capitalization and high core deposit funding, along with a history of consistent profitability underpinned by better than peer average operational efficiency and low credit costs. The BCA also incorporates the risks stemming from the bank's rapid asset growth since its establishment in 2001, driven by organic expansion, and a significant commercial real estate (CRE) concentration.
An additional credit challenge is its limited earnings diversity relative to similarly rated US regional bank peers. Signature Bank's revenue is almost entirely derived from net interest income, which heightens its vulnerability to interest rate shifts. Because of its high growth, the company's preprovision income remained steady for the first three quarters of 2020 at 1.7% of average assets compared to 2019. Its third quarter net interest margin of 2.55% was 13 basis points lower than a year ago, which is a modest decline.
The change in outlook to negative from stable reflects the downside pressure to Signature Bank's asset quality, capitalization and profitability that could arise from its continued above peer level loan growth as well as downside risks posed by the bank's high CRE concentration in the New York metropolitan area. Signature's loan growth of 13.1% over the last nine months ending 30 September 2020 despite economic slowdown stands in contrast with many regional bank peers' more modest growth excluding PPP loans. These loans, while underwritten by established teams hired by Signature from its competitors, are in newer lending areas for Signature as whole. In addition, its CRE exposure, which equals 5.5 times its tangible common equity (TCE) as of 30 September 2020, is among the highest of rated banks and is vulnerable to valuation declines as a result of the effects of the coronavirus pandemic.
Approximately 56% of the bank's CRE portfolio is multifamily mortgages, including a large portion of rent-regulated properties. The bank is afforded some protection by its portfolio's low loan-to-values, high debt service coverage, and experienced sponsors. However, forbearance obscures its asset quality. As of 7 December 2020, the bank reported principal and interest deferral on 3.1% of total loans. Positively, most borrowers have been returning to current status on both principal and interest, though in some cases borrowers are provided an extended modification of interest-only payments. At its peak as of 30 June 2020, Signature Bank reported deferrals on 24.5% of loans. Moody's expects worsening of Signature Bank's asset quality metrics from the current very low levels and that it may need to continue building its loan loss reserves. In addition, its capitalization as measured by Moody's TCE ratio has declined to 10.1% as of 30 September 2020 from 11.6% as of 31 December 2019, which is a greater decline than Moody's had anticipated because of exceptional loan growth and higher provisions.
The assigned Ba1(hyb) preferred stock rating is based on Signature Bank's baa1 standalone BCA and the instrument's deferral features and follows Moody's notching practices for US regional banks resulting from the application of its advanced loss-given-failure analysis.
Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact of the breadth and severity of the shock, and the deterioration in credit quality and capital it is going to trigger. Today's action also reflects the credit challenges that Signature Bank continues to face and that have partly driven the change in outlook to negative from stable.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative rating outlook, upward ratings movement is unlikely over the next 12 to 18 months. The outlook could return to stable if Signature Bank is able to sustain its asset quality while maintaining its capitalization at current levels and return to higher levels of profitability. This would also be supported by lower growth rate of loans. In addition, retention of deposits which have grown during the pandemic, supporting a stronger liquidity profile could support a return to a stable outlook.
Weakening of capitalization or profitability could result in a lower BCA and ratings. For example, if Moody's TCE ratio falls below 10% that could cause a negative action. Unfavorable trends in deferral balances or a worsening CRE outlook for Signature Bank's New York market which in turn would weaken in its asset quality, capital, or profitability metrics could also lead to a negative rating action. An increase in asset risk appetite, for example evidenced by accelerated growth or expansion into new lending sectors, may also adversely affect the ratings.
The principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
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Rita Sahu, CFA VP - Senior Credit Officer Financial Institutions Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 M. Celina Vansetti-Hutchins MD - Banking Financial Institutions Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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