BANC OF CALIFORNIA, INC.
Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDR) of
The Short-Term IDR of 'F3' of
The assigned Viability Rating (VR) of 'bbb-' is one notch below PACW's implied VR of 'bbb' reflecting a higher influence of Fitch's assessment of Capitalization and Leverage.
Key Rating Drivers
The company's IDRs, VR and senior debt ratings reflects PACW's record of strong asset quality, low credit losses, consistent financial performance and stable deposit base, balanced by its relatively spread-reliant business model, commercial real estate (CRE) concentration and elevated rate of loan growth, which has contributed to deterioration in its capital position.
PACW's asset quality remains a rating strength. As of 1Q22, its ratio of impaired loans to gross loans was 28 bps, compared to a peer median of 52 bps. Similarly, net charge-offs represented 2 bps as a share of average gross loans, relative to a peer median of 13 bps. This performance is partly offset by relatively high CRE concentration (regulatory CRE as a share of risk-based capital was 297% at 1Q22), as well as elevated borrower concentration.
Ratings are also supported by PACW's stable base of deposit funding, with a ratio of loans-to-customer deposits of 73.3% at 1Q22, which compared favorably to the median of mid-tier bank peers. PACW's share of noninterest-bearing deposit funding also compared favorably, at 42%, supporting a cost of funds of 27 bps at 1Q22. Reliance on brokered deposits was also manageable at roughly 1% of total deposits as of 1H22. In addition to well managed interest expense, PACW's branch-light business model also contributed to a peer-leading efficiency ratio of 49.3% at 1Q22. Strong expense control and low credit losses have underpinned above-average financial performance, with operating profit representing 2.1% of risk-weighted assets at 1Q22 and a prior five-year average of 2.5%.
These rating strengths are balanced by a high rate of loan growth which, in combination with the company's recent acquisitions, has pressured capitalization. During the first half of 2022, the company grew its loan portfolio by 15%, following 20% growth in 2021. Yoy growth has been concentrated in residential mortgage and asset-based commercial loans. Unfunded commitments have also grown rapidly, increasing by
Growth in turn has driven a more than 200 bps yoy decline in the company's CET1 ratio, which is Fitch's core capitalization metric, to 8.2% at 2Q22, as well as a decreased tangible common equity ratio to 5.2% from 7.8% 2Q21. PACW's recent issuance of
Ratings are also constrained by Fitch's assessment of PACW's relatively narrow business model, relatively low fee income contribution (8% of revenues as of 1H22) and moderate risk appetite, combining legacy community bank operations with national specialty businesses. In addition to its organic loan growth, PACW has a exhibited a consistent appetite for company and asset acquisitions, with well managed integrations to date.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Given PACW's loan concentrations, ratings could be negatively impacted by a deterioration in asset quality relative to similarly rated mid-tier bank peers. Ratings may also be sensitive to acquisition appetite viewed by Fitch as strategically incoherent or additive to the company's risk profile. While not expected, further sustained deterioration in CET1 below 8% could prompt negative rating action.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Ratings could be upgraded should PACW successfully execute a credible and sustained recovery in its CET1 ratio above 10%, in the absence of franchise-impairing strategic actions, significant deterioration in asset quality or an increase in loan concentration.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
PREFERRED SHARES
PACW's preferred shares have been downgraded to 'B+' from 'BB-', or four notches below its VR; two notches for loss severity given the securities' deep subordination in the capital structure, and two notches for non-performance given that the securities' coupon is non-cumulative and fully discretionary.
SUBORDINATED DEBT
PACW's subordinated debt rating has been downgraded to 'BB+' from 'BBB-', or one notch below its VR, reflecting one notch for loss severity. In accordance with Fitch's Bank Rating Criteria, this reflects alternate notching to the base case of two notches due to our view of
LONG- AND SHORT-TERM DEPOSIT RATINGS
HOLDING COMPANY
PACW's VR is equalized with that of its bank subsidiary
GOVERNMENT SUPPORT RATING
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
PREFERRED SHARES
PACW's preferred stock rating is sensitive to changes in PACW's VR, or to a reassessment of loss severity under a resolution scenario.
SUBORDINATED DEBT
Subordinated debt ratings are primarily sensitive to any change in PACW's VR.
LONG- AND SHORT-TERM DEPOSIT RATINGS
The long- and short-term deposit ratings are sensitive to any changes to PACW's Long- and Short-Term IDRs.
HOLDING COMPANY
Should PACW begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, Fitch could notch down the holding company IDR and VR from the ratings of the operating company. The holding company IDR and VR could be similarly affected by an inability to gain regulatory approval for the payment of dividends from the bank operating company to the holding company.
PACW's and Pacific Western Bank GSRs are rated 'ns' and there is limited likelihood that these ratings will change over the foreseeable future.
VR ADJUSTMENTS
The Asset Quality score of 'bbb' has been assigned below the 'aa' implied score due to the following adjustment reasons: Concentrations (negative) and Historical and Future Metrics (negative).
The Earnings and Profitability score of 'bbb+' has been assigned below the 'a' implied score due to the following adjustment reason: Revenue Diversification (negative).
The Capitalization and Leverage score of 'bb+' has been assigned below the 'bbb' implied score due to the following adjustment reason: Risk Profile and Business Model (negative).
The Funding and Liquidity score of 'bbb' has been assigned below the 'a' implied score to the following adjustment reason: Deposit Structure (negative) and Liquidity Coverage (negative).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
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