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Fitch Affirms Central Pacific's IDR at 'BBB-'; Outlook Stable
August 31, 2017 / 8:10 PM / 21 days ago

Fitch Affirms Central Pacific's IDR at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, August 31 (Fitch) Fitch Ratings has affirmed Central Pacific Financial Corp's (CPF) Long- and Short-Term Issuer Default Ratings (IDRs) at 'BBB-/F3'. The Rating Outlook remains Stable. A full list of rating actions follows at the end of this press release. KEY RATING DRIVERS IDRS AND VR The affirmation of CPF's ratings reflects its continued demonstration of its sound risk appetite and risk management framework that is in line with similarly rated banks. Management continues to make progress on reducing the level of nonperforming assets (NPAs) while incurring minimal credit costs. Additionally, management has also made progress on various revenue and expense initiatives that have improved CPF's earnings profile over the course of the past year, in line with Fitch's expectations. The Stable Outlook reflects Fitch's view that the bank's risk appetite and underwriting standards will remain sound as it pursues further loan growth to improve earnings and these standards will drive asset quality in line with similarly rated banks. CPF's core earnings profile remains a key ratings constraint despite some improvement over the past few years. Fitch notes that management's actions to target the expense base and grow loans have improved pre-provision net revenue by 10% year-over-year during the first half of 2017. Despite this, the overall level of returns remains lower than higher rated peers, with return on average assets (ROAA) below 1%. Returns have also been lifted by ongoing reserve releases, which total 13% of pre-tax income over the past ten quarters. As a result, Fitch continues to assess CPF's earnings profile as a key constraint, though management is engaged on several loan growth and expense initiatives that Fitch expects will contribute incrementally to results moving forward. Fitch also expects CPF to be able to take advantage of a rising rate environment relatively more than some higher-rated peers given its unique operating market, which should support its net interest margin and earnings. During the last rate-tightening period between 2004 and 2007, CPF, along with other Hawaii-based banks, was able to substantially lag deposit pricing compared to mainland banks. While the ultimate behavior of depositors is not expected to directly mirror past tightening cycles, Fitch expects CPF's depositor base to behave very similarly given the rational competition in Hawaii and the limited number of alternatives. Fitch believes CPF's improved risk management practices support its rating. The company has made significant investments to strengthen its risk controls and systems and has established underwriting standards that better align with its focus on its core Hawaii market. CPF has also made significant progress in reducing its NPAs, which now sit below peer averages at 0.65% as of June 30, 2017. Fitch also notes that this has been achieved while incurring minimal net charge-offs (NCOs). Today's affirmation and Stable Outlook reflect Fitch's expectation that NPAs and NCOs will remain in line with ratings peers as a result of CPF's improvements in its risk management processes. CPF's improved risk management framework is particularly important given the bank's significant loan growth, and this higher than peer level of growth is viewed cautiously given the very competitive environment banks currently face. Still, Fitch recognizes that growth has primarily been derived from loan originations within CPF's operating footprint while mainland lending remains opportunistic and continues to decline as a percentage of the portfolio. Fitch's expectation that growth will level off at the mid-single-digits and continue to primarily be derived from on-island opportunities is reflected in today's rating action. Fitch believes CPF's liquidity and capital positions are supportive of its ratings level, with the Common Equity Tier 1 Ratio (CET1) at 12.9% and the loan-to-deposit ratio at 73.8% as of June 30, 2017. Due to loan growth and an expected total pay out ratio near 100%, Fitch anticipates that CET1 may decline somewhat from current levels. Additionally, the company has indicated it expects to continue rotating its securities portfolio into loans, which would reduce liquidity. Nevertheless, given the bank's solid capital and liquidity levels, Fitch believes a moderate reduction is manageable at CPF's rating level, in the context of its improved risk appetite. SUPPORT RATING AND SUPPORT RATING FLOOR CPF has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, CPF is not systemically important and, therefore, the probability of support is unlikely. The IDRs and VRs do not incorporate any support. TRUST PREFERRED SECURITIES CPF's trust preferred stock rating has been affirmed at 'BB-' due to the affirmation of CPF's VR. This rating remains three notches below the VR in accordance with Fitch's assessment of the instruments' non-performance and loss severity risk profiles. HOLDING COMPANY CPF IDR and VR are equalized with its operating company, Central Pacific 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. LONG- AND SHORT-TERM DEPOSIT RATINGS CPF's uninsured deposit ratings at the subsidiary banks 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 VR CPF's ratings have limited upside potential within the Outlook horizon due to the bank's relatively narrow franchise and business model and lower earnings performance compared to higher rated peers. The rating action incorporates Fitch's view that CPF will moderately improve its earnings performance over the medium term and assumes that asset quality will remain solid. Fitch also expects that capital will decline moderately from the current level. If asset quality and capital remain within expectations and CPF's core earnings performance shows consistency at a level displayed by higher-rated peers, there could be further upside to CPF's ratings over a long-term time horizon. A negative rating action could occur if asset quality metrics deteriorate below peer averages or if Fitch observes the bank weakening its underwriting standards materially in pursuit of loan growth. Additionally, ratings would be sensitive should management seek to bring the bank's mainland credit exposure back to the levels leading up to the financial crisis. Furthermore, more aggressive capital management practices that lead to the CET1 Ratio falling below 11% could result in a negative rating action. SUPPORT RATING AND SUPPORT RATING FLOOR CPF's Support Rating and Support Rating Floor are sensitive to Fitch's assumption as to the bank's capacity to procure extraordinary support in case of need. TRUST PREFERRED SECURITIES Trust preferred securities issued by CPF and its subsidiaries are notched down from the VR of CPF in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Their ratings are primarily sensitive to any change in the VR of CPF. LONG- AND SHORT-TERM DEPOSIT RATINGS The ratings of long- and short-term deposits issued by CPF and its subsidiaries are primarily sensitive to any change in the company's IDR. This means that should a Long-Term IDR be downgraded, deposit ratings could be similarly affected. SUBSIDIARY AND AFFILIATED COMPANIES If CPF became undercapitalized or increased double leverage significantly there is the potential that Fitch could notch the holding company IDR and VR down from the ratings of the operating companies. Fitch affirms the following ratings: Central Pacific Financial Corporation --Long-term IDR at 'BBB-'; Outlook Stable; --Short-term IDR at 'F3'; --Viability Rating at 'bbb-'; --Support at '5'; --Support Rating Floor at 'NF'. Central Pacific Bank --Long-term IDR at 'BBB-'; Outlook Stable; --Short-term IDR at 'F3'; --Viability Rating at 'bbb-'; --Long-term Deposits at 'BBB'; --Short-term Deposits at 'F2'; --Support at '5'; --Support Rating Floor at 'NF'. CPB Capital Trust I, II & IV CPB Statutory Trust III & V --Trust preferred securities at 'BB-'. Contact: Primary Analyst Christopher Van Bell Associate Director +1-212-908-0777 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Bain K. Rumohr, CFA Director +1-312-368-3153 Committee Chairperson Justin Fuller, CFA Senior Director +1-312-368-2057 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. 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