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Signature Bank's SBNY ratings have been affirmed by Moody's Investors Service. However, the company’s rating outlook has been downgraded to negative from stable.
The ratings agency has affirmed the long- and short-term deposit ratings at A2/Prime-1 and the long-term issuer rating at Baa2. Also, the ratings agency maintained the company's baa1 baseline credit assessment. The ratings agency also assigned a Ba1(hyb) rating to the company's non-cumulative perpetual preferred stock.
Reasons Behind the Affirmation
The affirmations are reflective of Signature Bank’s balance sheet strength and a solid track record of profitability. The company's balance sheet reflects robust capitalization and high levels of core deposits. Further, the company's above average operational efficiency and low credit costs is also a tailwind. The ratings agency also takes into account the company's quick growth in assets.
However, the company's earnings diversity remains a headwind. As a substantial portion of the company's income is attributed to net interest income, it remains prone to interest rate risks. Further, the company's pre-provision income remained unchanged at 1.7% of average assets for the first three quarters of 2020. Marginal decline in net interest margin is also a concern.
Reasons Behind Outlook Downgrade
Signature Bank's significant exposure to the commercial real estate (“CRE”) sector is worrisome since this can dent its asset quality, capitalization and profitability levels. Further, its CRE exposure of 5.5 times of tangible common equity (“TCE”) is among the highest for rated banks and is vulnerable to valuation declines due to the effects of the pandemic.
Moreover, about 56% of the bank's CRE portfolio is multifamily mortgages, which includes many rent-regulated properties. As of Dec 7, 2020, the company reported principal and interest deferral on 3.1% of total loans. Although most borrowers are returning to current status on both principal and interest, some are provided an extended modification of interest-only payments.
Notably, the company's portfolios have low loan-to-value ratios and high debt service coverage, However, forbearance hurts its asset quality.
Further, the company's 13.1% loan growth in the first three quarters of 2020 is above its peers. However, the loans have been given to newer lending areas, which can be a risk.
Also, the company's TCE ratio has declined. As of Sep 30, 2020, TCE ratio was 10.1%, declining from 11.6% as of Dec 31, 2019. This decline was more than expected by the ratings agency due to substantial loan growth and higher provisions.
What can Trigger a Change in Moody’s Ratings?
Signature Bank's rating’s upward climb looks unlikely over the next 12 to 18 months. However, the outlook could return to stable if the company maintains its asset quality and returns to higher profitability levels. Also, muted rate of loan growth and deposit retention will aid a return to stable outlook.
However, worsening of capitalization and lowering of profitability levels could hurt its ratings. Further, any adversity in the CRE portfolio could also have a negative impact on the ratings. Heightened lending activities to new sectors could also hurt ratings.
Price Performance & Zacks Rank
Shares of Signature Bank have declined 4.8% so far this year compared with 19.1% decrease of the industry it belongs to.
Currently, the company carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Rating Actions By Moody’s on Other Finance Companies
In the past few months, Moody’s Investors Service has affirmed ratings for many finance sector companies. Amid the coronavirus pandemic and the resultant economic uncertainties, the ratings for Eaton Vance EV, FirstCash FCFS and SLM Corporation SLM have been maintained.
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