March 29, 2017 / 5:25 PM / 5 months ago

Fitch Maintains Rating Watch Evolving on Astoria Financial

(The following statement was released by the rating agency) NEW YORK, March 29 (Fitch) Fitch Ratings maintains the Rating Watch Evolving (RWE) on Astoria Financial Group, Inc.'s (AF) 'BBB-' Long-Term Issuer Default Ratings (IDRs) and its principal banking subsidiary, Astoria Bank. On March 7, 2017, AF and Sterling Bancorp (Sterling; not rated) announced that they entered into a definitive merger agreement in a stock-for-stock transaction valued at approximately $2.2 billion. A full list of rating actions follows at the end of this release. The RWE reflects uncertainty as to the ultimate credit profile of AF. During the Rating Watch period, Fitch will evaluate Sterling Bancorp's credit profile on a pro forma basis with Astoria. Fitch would expect to resolve the Rating Watch upon closing of the transaction, which is expected to occur in the fourth quarter of 2017 (4Q17). AF is included in Fitch's annual U.S. Niche Real Estate Bank Peer Review, which also includes New York Community Bancorp, Inc. (NYCB) and Dime Community Bancshares, Inc. While the business models of the U.S. Niche Real Estate Banks vary, these banks are generally characterized by their limited deposit franchises and geographic concentrations when compared to larger U.S. banks. Fitch views these limitations as ratings constraints across the peer group. The group is composed of banks with total assets ranging from approximately $5 billion to approximately $50 billion that lend primarily in the New York City metropolitan residential real estate market. KEY RATING DRIVERS IDRS AND VIABILITY RATINGS In Fitch's opinion, the planned merger would result in an improved earnings profile, interest rate sensitivity, and a lower loan to deposit (LTD) ratio. Offsetting this, the pro forma capital ratios are estimated to be lower than AF's reported ratios at year-end 2016. Other negative aspects to this transaction include possible execution risks, and an increase in the company's concentration in commercial real estate (CRE). On a pro forma basis, the merger is expected to improve AF's return on tangible assets by about 95bp) through operating expense savings, loan and securities portfolio repositioning, and interest expense savings as higher cost borrowings are marked and refinanced. Further, the merger is expected to result in an asset sensitive balance sheet, which should benefit from an expected increase in interest rates. AF has historically been liability sensitive. From a funding and liquidity perspective, the merger is expected to result in a LTD ratio of 95%, an improvement compared to AF's LTD ratio of 115% at Dec. 31, 2016. The transaction should also result in a more diversified funding mix, which Fitch views positively. Although Fitch views the potential for earnings improvement positively overall, there are several notable aspects to the transaction that we view negatively. First, the pro forma tier 1 capital ratio is estimated to be approximately 630bps lower than AF's standalone tier 1 capital ratio at year-end 2016, while the pro forma TCE ratio is estimated to be approximately 167bps lower. Fitch also believes there is execution risk, particularly in operating expense savings assumptions given little branch overlap. Sterling has completed numerous acquisitions over the past several years, and Fitch has no visibility into the company's integration plans at this point. Although AF's balance sheet is non-complex, Fitch believes execution risks are higher than Sterling's prior acquisitions given AF's large relative size; Sterling and Astoria are nearly equal in size. Given heightened regulatory focus on CRE concentration, we view the pro forma increase in CRE to roughly 300% of total risk-based capital from 257% cautiously, especially since capital ratios are expected to fall considerably upon transaction close. Banks operating with high CRE concentration are subject to increased regulatory scrutiny of risk management practices including underwriting, stress testing, and oversight. Given Sterling's intention to refocus the loan portfolio on commercial and industrial (C&I) loans, traditional CRE, and commercial finance, Fitch expects asset quality to worsen over time relative to AF's historical performance. SUPPORT RATING AND SUPPORT RATING FLOOR AF has a SR of '5' and SRFl of 'NF'. In Fitch's view, AF is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not currently incorporate any support. HOLDING COMPANY AF's IDR and VR are equalized with those of its bank subsidiary, Astoria Bank, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary default probabilities. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES AF's preferred securities are rated five notches below its VR. Preferred stock is notched two times from the VR for loss severity, and three times for non-performance. Hybrid securities ratings are in accordance with Fitch's criteria and assessment of the instruments' non-performance and loss severity risk profiles. LONG- AND SHORT-TERM DEPOSIT RATINGS AF's uninsured deposit ratings are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. RATING SENSITIVITIES IDRs and VRS, Upon further review and evaluation of Sterling Bancorp's credit profile including its management and strategy as well as its financial profile, Fitch expects to resolve the Rating Watch Evolving. The resolution of the Rating Watch may take longer than six months. At the conclusion of the review, the ratings could remain unchanged, be upgraded or downgraded. The ratings could also be withdrawn if Fitch is unable to fully evaluate Sterling Bancorp's credit profile pro forma with Astoria. Closing is expected in 4Q17 and subject to customary closing conditions, including required regulatory approvals. If the transaction were not to occur, Fitch would reassess AF's credit profile in light of a second failed merger transaction. Since late 2015, AF's management team has been focused on preparing for and ultimately completing a merger, first with New York Community Bancorp ('BBB+/F2'/Outlook Stable), which was terminated in December. Fitch believes this has caused some distraction in running the core and ongoing operations of the bank and retaining personnel. As such, Fitch would likely view such an event negatively. SUPPORT RATING AND SUPPORT RATING FLOOR AF's SR and SRF are sensitive to Fitch's assumption as to capacity to procure extraordinary support in case of need. HOLDING COMPANY Should AF begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of Astoria Bank. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings of subordinated debt and other hybrid capital issued by AF and its subsidiary are primarily sensitive to any change in AF's VR. LONG- AND SHORT-TERM DEPOSIT RATINGS The ratings of long- and short-term deposits issued by AF and its subsidiaries are primarily sensitive to any change in AF's long- and short-term IDRs. Fitch maintains the following ratings on Rating Watch Evolving: Astoria Financial Corporation --Long-Term IDR 'BBB-'; --Short-Term IDR 'F3'; --Senior Debt 'BBB-'; --Preferred Stock 'B'; --Viability Rating 'bbb-'. Astoria Bank (Formerly Astoria Federal Savings and Loan Association) --Long-Term IDR 'BBB-'; --Short-Term IDR 'F3'; --Long-term Deposits 'BBB'; --Short-term Deposits 'F2'; --Viability Rating 'bbb-'. Fitch has affirmed the following ratings: Astoria Financial Corporation --Support Rating at '5'; --Support Rating Floor at 'NF'. Astoria Bank (Formerly Astoria Federal Savings and Loan Association) --Support Rating at '5'; --Support Rating Floor at 'NF'. Contact: Primary Analyst Stefan Kahandaliyanage, CFA Associate Director +1-646-582-4918 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Johann Moller, CFA, FRM Associate Director +1-646-582-4954 Committee Chairperson Sean Pattap Senior Director +1-212-908-0642 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1021301 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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