November 22, 2017 / 2:40 PM / 25 days ago

Fitch Affirms TCF Financial Corporation at 'BBB-'; Ratings Withdrawn

(The following statement was released by the rating agency) NEW YORK, November 22 (Fitch) Fitch Ratings has affirmed and withdrawn the ratings for TCF Financial Corporation (TCF) and its principal banking subsidiary TCF National Bank (TCF Bank) including the companies' Issuer Default Ratings (IDRs) of 'BBB-'. The ratings are being withdrawn with a Stable Outlook. As communicated on Oct. 20, 2017, Fitch is withdrawing the ratings for commercial reasons. A full list of rating actions follows at the end of this release. KEY RATING DRIVERS IDRs and VRs Today's rating affirmation reflects TCF's good earnings levels, improved asset quality metrics and diversified business model. Offsetting these strengths are what Fitch considers to be a relatively high risk appetite and low levels of capital relative to higher rated peers. TCF's asset quality metrics as measured by Fitch's nonperforming asset (NPA) ratio (inclusive of accruing TDRs) was 1.36% of held-for-investment loans and foreclosed real estate as of the third quarter of 2017 (3Q17). After declining by 65 basis points (bps) year-over-year, the aforementioned ratio has now converged with the Fitch mid-tier regional bank peer group average. The decline in NPAs are attributable to TCF's successful loan sales comprised mostly of consumer mortgage loans totalling approximately $76 million in 2017. Both sales resulted in net recoveries. This improvement was offset by the inflow of approximately $97 million in new nonaccruals over the first nine months of 2017 against about $84 million in repayment, foreclosures, net charge-off and cure. In April 2017, TCF announced a shift in strategy for its indirect auto lending business to a pure originate-to-hold model from the previous originate-to-hold and sell blended approach. Management has scaled back the business with originations falling by nearly 45% year-over-year as of 3Q17. TCF has successfully offset lost gain-on-sale revenue from the auto finance portfolio by lowering the cost structure in the business and increasing loan yields by 113bps year-over-year as of 3Q17. Higher loan yields have come at the expense of an increased cost of risk with credit loss rates ticking up marginally by 27bps in the third quarter relative to the year-ago quarter. Fitch views the increased risk-taking in the auto loan portfolio as credit negative, especially at this point in the cycle. However, loss rates have remained in line with industry peers over the last two quarters. The portfolio remains a relatively small and shrinking portion of the overall loan portfolio at 17% as of 3Q17. Fitch also positively notes that the annualized net-charge off rate for the entire loan portfolio stood at 27bps for the first nine months of 2017, 8bps lower than the same period in the prior year and reflects the benefits of a well-diversified loan portfolio. TCF's earnings have steadily improved in the last few years and the bank's ROAA of 101bps for the first nine months of 2017 was slightly higher than the peer median. With a slightly improving efficiency ratio, management continues to show progress with earnings improvement. Fitch expects TCF's net interest margin to benefit from further rate increases owing to lagged deposit repricing in the granular retail deposit base and a relatively short duration loan portfolio compared to the industry. TCF's level of capital remains at the low end of the peer group with the CET 1 at 10.05% as of 3Q17. Capital ratios trended lower over the year as loans grew by 9.2% year-over-year as of 3Q17. Loan growth was affected by the acquisition of $446 million in equipment finance loans in 3Q17 and $345 million in sub-prime auto loans that were transferred to the held-for-investment portfolio in 2Q17. Adjusting for these actions, loans grew by roughly 4.7% year-over-year. TCF has maintained a disciplined dividend pay-out ratio of around 25% and leverage is line with peer averages as reflected in the tangible common equity ratio of 9.06% as of 3Q17. Nevertheless, Fitch views TCF's level of risk-based capital as low relative higher rated peers and the bank's overall risk appetite. Fitch views TCF's liquidity profile as adequate relative to the rating level. TCF's granular and predominantly retail deposit base is fully invested in the loan portfolio. The loan-to-deposit ratio stood at 106% as of 3Q17, higher than most mid-tier regional peers. As of 3Q17, TCF had additional borrowing capacity of $1.5 billion with the Federal Home Loan Bank of Des Moines. The bank also has access to other secondary liquidity sources such as the Fed discount window. Finally, Fitch positively notes that in September 2017, claims relating to alleged violations of Regulation E were dismissed by authorities. The CFPB announced in January that it was taking legal action against TCF in connection with the bank's overdraft opt-in practices. Furthermore, claims relating to unfair, deceptive and abusive conduct under the Consumer Financial Protection Act (CFPA) were also dismissed for periods prior to July 21, 2011. However, the court denied TCF's motion to dismiss CFPA claims for periods after July 2011. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES TCF Bank's subordinated debt is notched one level below its Viability Rating (VR) of 'bbb-' for loss severity. TCF's preferred stock is notched five levels below its VR of 'bbb-', two times for loss severity and three times for non-performance. These ratings are in accordance with Fitch's criteria and assessment of the instruments non-performance and loss severity risk profiles and have thus been affirmed due to the affirmation of the VR. LONG- AND SHORT-TERM DEPOSIT RATINGS The uninsured deposit ratings of TCF Bank are rated one notch higher than the bank's IDR because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. HOLDING COMPANY TCF's VR is equalized with those of its operating companies and banks, 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 failure and default probabilities. SUPPORT RATING AND SUPPORT RATING FLOOR TCF has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, TCF is not systemically important, and therefore the probability of support is unlikely. Issuer Default Ratings (IDRs) and Viability Ratings (VRs) do not incorporate any support. RATING SENSITIVITIES Rating sensitivities are no longer relevant for any of the ratings given today's rating withdrawal. Fitch has affirmed and withdrawn the following ratings with a Stable Outlook: TCF Financial Corp. --Long-term IDR at 'BBB-'; --Short-term IDR at 'F3'; --Preferred stock at 'B'; --Viability Rating at 'bbb-'; --Support at '5'; --Support Rating Floor at 'NF'. TCF National Bank --Long-term IDR at 'BBB-'; --Short-term IDR at 'F3'; --Viability Rating at 'bbb-'; --Subordinated debt at 'BB+'; --Long-term deposits at 'BBB'; --Short-term deposits at 'F3'; --Support at '5'; --Support Rating at 'NF'. Contact: Primary Analyst Johannes Moller, CFA Associate Director +1-646-582-4954 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Justin Fuller, CFA Senior Director +1-312-368-2057 Committee Chairperson Sean Pattap Senior Director +1-212-908-0642 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@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 Solicitation Status here#solicitation 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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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