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BankUnited (BKU) Ratings Affirmed by Moody's, Outlook Stable

Zacks Equity Research

BankUnited, Inc. BKU and its subsidiary BankUnited NA’s ratings have been affirmed by Moody’s Investors Service, the rating arm of Moody’s Corporation MCO. The outlook for the company remained stable.

The subsidiary was rated A3/Prime-2 for long and short-term deposits and rating for standalone Baseline Credit Assessment (BCA) remained at baa2. The company was rated Baa3 for senior unsecured debt.

Notably, Moody's assigned provisional ratings to the holding company’s shelf registration. The shelf was rated (P) Baa3 for senior unsecured, (P) Baa3 for subordinate, (P) Ba1 for cumulative preferred stock and (P) Ba2 for non-cumulative preferred stock.

Reasons Behind the Affirmation

The company’s focus on bolstering direct banking franchise organically and developing its deposit funding profile has driven the affirmation. Also, the assigned shelf ratings follow Moody's notching practices for U.S. regional banks resulting from its advanced loss-given-failure analysis.

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The rating agency noted that the company’s loan growth has noticeably moderated, which is a credit positive. Also, its commercial real estate (CRE) concentration has been reduced following the de-emphasis on multi-family lending, which is down significantly from peak levels.

Though underwriting standards are considered to be conservative, CRE makes up a sizable portion of BankUnited’s total loan portfolio. Also, exposure to New York rent regulated multi-family apartment buildings loans remains a concern as valuations could suffer due to recent legislative changes.

Moody’s is of the opinion that BankUnited's portfolio is facing slow expansion against well-above-average increases it witnessed earlier due to management's transition of BankUnited's franchise from a failed thrift concentrated in mortgages to a more diversified commercial bank. The rating agency feels that the transition is now largely complete.

However, Moody's believes that reduction in unpaid principal balance of acquired credit impaired loans, formerly covered by FDIC loss-sharing agreements ($390 million as of Mar 31, 2019), has eroded the accretion income that supported BankUnited's profitability in the recent years.

What Can Drive Ratings Up or Down?

An upward rating movement will require sustained improvement of BankUnited's core funding profile, including a reduction in its comparative funding costs. The continued maturation of its commercial banking franchise, evidenced by a moderate pace of growth and strong asset quality through the cycle, would also be positive for the ratings.

Downward rating pressure can occur if there is significant weakening of BankUnited's profitability or asset quality, or if its concentration risk increases considerably.

In the past six months, BankUnited’s shares have rallied 16.6% compared with the industry’s growth of 18.5%.

Currently, the stock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other Stocks to Consider

M&T Bank Corporation MTB carries a Zacks Rank of 2. Its earnings estimates for 2019 have been revised upward marginally over the last 60 days. Also, its shares have gained 22.2% in the past six months.

Citigroup Inc. C carries a Zacks Rank of 2. In the past 60 days, the Zacks Consensus Estimate for the company has increased nearly 1% for the current year. Its share price has gained 38.2% in the past six months.

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