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Fitch Affirms CVB Financial Corp's LT IDR at 'BBB'; Outlook Revised to Positive
September 5, 2017 / 9:09 PM / 16 days ago

Fitch Affirms CVB Financial Corp's LT IDR at 'BBB'; Outlook Revised to Positive

(The following statement was released by the rating agency) NEW YORK, September 05 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDR) and Viability Rating (VR) of CVB Financial Corp. (CVB) and its primary bank subsidiary, Citizens Business Bank, at 'BBB'. The Rating Outlook has been revised to Positive from Stable. See the full list of rating actions at the end of this release. KEY RATING DRIVERS IDR and VR Fitch views CVB's solid earnings profile as a key rating strength, evidenced by its 40-quarter return on average assets (ROAA) of 1.19%, the highest among the Fitch Large Community Bank peers. Furthermore, the stability of earnings as measured by the standard deviation is also among the best for the peer group. Offsetting this strength is a concentrated revenue profile that consisted of only 13% non-interest income during the first six months of 2017. Fitch calculates a nonperforming asset ratio (inclusive of accruing troubled debt restructurings) of 0.71% as of second quarter 2017 (2Q17), lower than the 1.04% reported a year prior and a significant improvement from the 1.8% level reported for FYE2015. This improvement comes despite CVB maintaining a 40-quarter average net charge-off ratio of only 27bps. This track record reflects CVB's sound loan underwriting and moderate risk appetite that allowed CVB to perform well despite the challenges in California during the Great Recession. Fitch recognizes that CVB's loan portfolio is now less concentrated in construction loans relative to pre-recession levels. This improves the overall credit risk in the loan portfolio, since large construction loans were the main drivers of credit loss severity during the most recent credit cycle. Furthermore, Fitch notes that some of the risks associated with the California drought have now moderated due to increased reservoir levels and water allocations to CVB's dairy and agribusiness customers. The rating also reflects CVB's strong capital position. CVB has the highest tangible common equity-to-tangible assets (TCE/TA) ratio in the Large Community Bank peer group that stood at 11.3% as of 2Q17. Fitch views CVB's conservative capital management practices as an important offset for the product and geographic concentrations in the bank loan portfolio. CVB's regulatory commercial real estate loan (CRE) concentration was 230% of total risk-based capital as of 2Q17, a level that Fitch views as manageable. As CVB approaches $10 billion in assets, management has indicated that they will continue to seek scale to manage the expense burden associated with increased regulatory compliance costs. Consistent with CVB's acquisitive strategy, the current rating action incorporates the possibility of a future acquisition. Management has publicly expressed the appetite for a deal as large as $4 billion in assets, although management has stringent criteria for such a deal, including that the target bank should be in the state of California within CVB's existing or adjacent markets, and have a similar business model and customer base as CVB. Accordingly, the rating and Outlook assume that CVB will adhere to its criteria and that the deal will be structured in a way that capital dilution as well as overall CRE concentration remains manageable and in line with our expectations for the rating level. CVB continues to maintain the lowest cost of deposits in the Fitch Large Community Bank peer group which was only 9bps at 1Q17. CVB's successful gathering of a relatively high proportion of non-interest bearing deposits and operating accounts from small business customers is a rating strength. However, this strength is partially offset by CVB's high reliance on spread revenue relative to peers and what tends to be a more concentrated deposit base. CVB's loan-to-deposit ratio stood at 70% as of 2Q17, one of the lowest in its peer group and a level that provides headroom for optimization of the deposit mix in a rising rate environment. The rating therefore incorporates an increase in the loan-to-deposit ratio over the near- to medium-term, although Fitch assumes that liquidity will continue to be managed conservatively. CVB's ratings remain constrained by its relatively limited geographic footprint, which is concentrated in Southern and Central California. Like other community banks, this concentration exposes CVB to a regional economic shock. Additionally, CVB's loan portfolio is concentrated in CRE lending products which makes up approximately 70% of the bank's loan portfolio. SUPPORT RATING AND SUPPORT RATING FLOOR CVB has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, CVB is not systemically important and, therefore, the probability of support is unlikely. The IDRs and VRs do not incorporate any support. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES CVB Statutory Trust III's trust preferred stock is notched four levels below CVB's VR. These ratings are in accordance with Fitch's criteria and assessment of the instruments' non-performance and loss severity risk profiles. Thus, these ratings have been upgraded due to the upgrade of the VR. The preferred stock is notched 2x from the VR for loss severity, and 2x for non-performance. HOLDING COMPANY The IDR and VR of CVB are equalized with its operating company, Citizens Business 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 Fitch's view of the very close correlation between holding company and subsidiary failure and default probabilities. LONG- AND SHORT-TERM DEPOSIT RATINGS CVB'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 Current positive rating momentum is premised on Fitch's expectation that over the near- to mid-term, CVB will continue to report earnings that are in line with or better than higher rated peers all the while adhering to its disciplined growth and capital management strategy. To the extent that Fitch observes continued strong earnings, capital management in line with our expectations, and credit performance that aligns with higher rated peers, positive rating action could be taken. The rating and Outlook also incorporate a future bank acquisition provided such a deal is in line with our aforementioned expectations and provided it fits the criteria communicated publicly by CVB. Positive rating momentum will only be maintained if capital management through an acquisition is in line with our expectations. Specifically, should capital be managed more aggressively such that CVB's TCE/TA ratio falls below 8%, Fitch would reassess the current level and Outlook to determine if it is still appropriate. Fitch believes that asset quality improvement will moderate going forward and could even reverse nominally, as credit metrics are expected to normalize across the industry. The rating and Outlook incorporate our expectation that CVB's credit performance will be in line with both equally and higher rated peers, especially those banks operating in CVB's market. However, if CVB's credit trends reverse materially and do not remain in line with expectations, particularly if large loans become impaired, negative rating action could be taken. SUPPORT RATING AND SUPPORT RATING FLOOR CVB's Support Rating and Support Rating Floor are sensitive to Fitch's assumption as to capacity to procure extraordinary support in case of need. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES All hybrid capital issued by CVB and its subsidiaries is notched down from the VRs of CVB 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 VRs of CVB. HOLDING COMPANY While not currently expected, if CVB became undercapitalized or management increases the level of double leverage significantly, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies. LONG- AND SHORT-TERM DEPOSITS The ratings of long- and short-term deposits issued by CVB and its subsidiaries are primarily sensitive to any change in the company's IDR. This means that should rating action be taken on the Long-Term IDR, deposit ratings could be similarly impacted. Fitch has affirmed the following ratings and revised the Outlooks to Positive from Stable: CVB Financial Corp. --Long-Term IDR at 'BBB'; Outlook Positive; --Viability Rating at 'bbb'; --Short-Term IDR at 'F2'; --Support at '5'; --Support Rating at 'NF' Citizens Business Bank --Long-Term IDR at 'BBB'; Outlook Positive; --Long-term deposit at 'BBB+'; --Short-Term IDR at 'F2'; --Short-term deposit rating at 'F2'; --Viability Rating at 'bbb'; --Support floor at 'NF'; --Support at '5'. CVB Statutory Trust III --Preferred stock at 'BB-'. Contact: Primary Analyst Johannes Moller, CFA Associate Director +1-646-582-4954 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Bain 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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