Yahoo Finance Associated Banc-Corp (ASB) Ratings, Outlook Affirmed by Moody's
Associated Banc-Corp ASB and its banking subsidiary Associated Bank, N.A.’s outlook has been re-affirmed as stable by Moody's Investors Service, a division of Moody’s Corporation MCO. The rating agency has affirmed the company’s Baa3 standalone baseline credit assessment. The holding company’s issuer rating of Baa3 for long-term senior unsecured notes also remained unchanged.
Reasons for Affirming the Ratings
Per Moody’s, Associated Banc-Corp’s ratings affirmation reflects the balance between its credit headwinds due to its significantly concentrated portfolio in commercial real estate (CRE) loans and the offsetting qualitative and quantitative risk mitigating factors.
The rating agency is of the opinion that concentrated CRE exposure might exert pressure on ASB’s asset quality and profitability in light of the current high interest rate environment reflecting unique challenges to CRE, specifically office loans. As of Mar 31, 2024, the asset class represents 241% of ASB’s tangible common equity (TCE).
ASB’s TCE/risk-weighted assets (RWA) were 9.3% as of Mar 31, 2024, thus, capitalization indicates a relative rating weakness for the company as compared with its peers. This magnifies the impact of CRE and offers a thinner cushion against unexpected losses.
Despite this, Associated Banc-Corp’s CRE loans constitute only 25% of its total loans, which is relatively lower than many other regional banks. Moreover, Moody’s noted that the company’s largest CRE exposures appear to be well-underwritten and managed, thus, mitigating the associated credit risk with the loans.
Per the rating agency, Associated Banc-Corp’s capitalization levels, long-run profitability (with five-year average net income/tangible assets of 0.8% from 2019 to 2023) and appropriate credit risk are sufficient to mitigate its CRE concentration risks at the current rating level.
With liquid banking assets comprising 15.6% of tangible banking assets, ASB’s balance sheet liquidity is considered a relative weakness, per the rating agency. Yet, the affirmation indicates that the company’s core deposit funding, with roughly 77% insured and collateralized deposits, is adequate at the existing rating level to offset funding pressures despite depositors continuing to switch to accounts offering higher interest rates.
Additionally, Associated Banc-Corp’s profitability metrics remain moderate with a marginal improvement expected in 2024, driven by its recent balance sheet repositioning efforts, which included the sale of low-yield residential loans and investment securities. The resulted proceeds were used to redeem high-cost wholesale funding as well as investment in securities offering higher yields in order to offer support to offset the industry-wide funding cost pressures.
Yet, Moody’s considers it unlikely that the bank’s net income to tangible assets will exceed 0.8% in 2024, which is a level that remains roughly in line with its recent five-year average.
Reason Behind No Change in Outlook
The primary reason behind the reiteration of the stable outlook is Associated Banc-Corp’s highly concentrated loan portfolio in CRE loans and weaker capital and liquidity position compared with its peers.
Yet, its insured deposit mix and well-managed CRE loans mitigate its default risk. Further, its balance sheet repositions efforts are likely to be marginally accretive to its earnings in 2024.
What Can Trigger a Change in Ratings?
The ratings for Associated Banc-Corp could upgrade if it sustains the TCE/RWA ratio comfortably above 10.5%, enhances its pre-provision profitability and continues to have lower loan losses alongside an improvement in its funding profile.
Further, ratings can go down if Moody’s thinks the company’s asset quality is worsening or its risk exposure is likely to increase. Additionally, a TCE/RWA ratio below 9% would also lead to negative pressures on the ratings.
Price Performance & Zacks Rank
Shares of Associated Banc-Corp have jumped 22.1% in the past year compared with the industry’s 15.4% growth.
Image Source: Zacks Investment Research
ASB currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Rating Action by Moody’s on Other Firms
Last month, Moody’s downgraded the ratings of Truist Financial TFC from Baa1 to A3. Notably, their outlook was changed to stable by the rating agency.
The core rationale behind Moody's decision to downgrade ratings is TFC's strategic moves, particularly the completion of the sale of its remaining 80% interest in TIH and subsequent balance sheet repositioning. While these steps have bolstered the bank's capitalization and liquidity profile, they have also exposed it to certain vulnerabilities.
Similarly, In March, Moody’s upgraded the ratings of New York Community Bancorp NYCB from B2 to B3. Further, the outlook for the bank was changed to positive by the rating agency.
Per the rating agency, the incremental capital will help NYCB absorb credit losses on its CRE portfolio and offer a source of liquidity that has been affected due to a decline in deposits. Another rationale for the credit rating upgrade was NYCB receiving an unqualified audit opinion on its 2023 ended financial statements.
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Moody's Corporation (MCO) : Free Stock Analysis Report
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