Moody's Investors Service – the credit rating arm of Moody's Corp. (MCO) – has placed the ratings of First Niagara Financial Group Inc. (FNFG) and its affiliates on review for a possible downgrade. The rating agency believes the company has compromised with creditworthiness while achieving significant growth in its loan portfolio.
Currently, First Niagara’s issuer rating of ‘Baa 2’ is under review for a downgrade. Moreover, the company’s subordinate debt and senior unsecured debt that currently holds ‘Baa3’ and ‘Baa2’ ratings, respectively, is under review for a downgrade.
First Niagara’s main operating bank, First Niagara Bank, N.A., has a long-term deposit rating of ‘Baa1,’ which is also under review for a downgrade. Moreover, the bank’s senior unsecured deposit rating of ‘Baa1’ is under review for a downgrade. The bank’s financial strength rating of ‘C’ and short-term obligations rating of ‘Prime-2’ were affirmed by the rating agency and are not under review.
From the outlook front of both First Niagara and its subsidiary bank, the status changed from ‘stable’ to ‘rating under review.’
First Niagara’s faster pace of loan growth prompted Moody’s to review its ratings for a possible downgrade. The surge in loan stemmed from acquisitions and growth in originations in commercial loan and indirect auto loan, precisely from the exposures in new geographic markets. However, concern arises owing to the fact that the growth is significantly higher than that of the company’s peer group at a time when the market is facing a stiff competition for lending volumes.
Moody’s will scrutinize the steps taken by First Niagara that led to the boost in its loan portfolio along with any changes incorporated by the company to improve its risk management infrastructure for managing larger loan volumes and portfolio sizes.
Further, Moody’s will asses First Niagara’s risk profile of above-average holdings of credit-sensitive securities. As of Sep 30, 2013, the ratio of credit-sensitive securities to total investments surged to 45% from 18% as of Dec 31, 2011. Also, compared with its peers, the company had one of the highest total investments to total assets ratios that stood at 31% as of 30 Sep, 2013.
First Niagara’s capital ratios declined in the past year owing to increased growth in loan and increased dividend payments. Notably, the payout ratio was 43% for the nine months ended Sep 30, 2013.
As of Sep 30, 2013, tangible common equity to risk-weighted assets ratio and tier 1 leverage ratio stood at 8.8% and 7.1%, respectively, which were much lower compared to peer companies with similar ratings. Hence Moody’s will also lay emphasis on the company’s capital management plans.
If Moody’s downgrades First Niagara’s ratings, it will surely hurt investors’ confidence in the stock. Nevertheless, we remain optimistic about the performance of the company following its third-quarter earnings release that outpaced the Zacks Consensus Estimates amid a prevailing low interest rate environment and sluggish economic recovery.
First Niagara currently carries a Zacks #3 Rank (Hold). Some better-ranked Savings and Loan Institutes include Investors Bancorp Inc. (ISBC) and Meridian Interstate Bancorp, Inc. (EBSB), both carrying a Zacks Rank #1 (Strong Buy).
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