DBRS Confirms Webster Financial Corporation at BBB, Trend is Stable

DBRS, Inc. (DBRS) has today confirmed the ratings of Webster Financial Corporation (Webster or the Company), and its related entities, including its BBB Issuer & Senior Debt rating and R-2 (middle) Short-Term Instruments rating. The trend on all ratings remains Stable.

Webster’s ratings are underpinned by a well-entrenched Southern New England deposit franchise that includes ample market shares in its key central Connecticut MSAs, a strong funding and liquidity profile that reflects a sizable core deposit base, and a solid capital position, underscored by a strong Tier 1 common equity position. Ratings are also underpinned by the Company’s positively trending, yet still pressured asset quality and strained earnings generation.

While acknowledging the Company’s solid deposit franchise, DBRS notes that Webster faces significant competition within its broader Southern New England and northeast footprint, including large national banks, super-regionals, smaller regional banks and savings banks, which, in part, likely led the Company to do more out of footprint lending that caused elevated losses in the downturn. DBRS views positively that Webster has refocused its lending businesses within the northeast. Furthermore, the Company has focused on deepening its client relationships and is investing in new products and technology in its deposit franchise (for example e-checking and treasury services). Similar to most banks, improving its earnings generation capacity is a challenge for the Company. This challenge is compounded by a difficult rate environment and new regulations that are pressuring fees and increasing expenses for all banks. That said, DBRS sees Webster as well-placed in its current rating category based on profitability metrics, though current levels of profitability limit potential upgrades.

For 2Q12, Webster reported $40.6 million in earnings available to common shareholders, up 6.0% sequentially, and up 21.8% from 2Q11. Loans and transaction deposits continue to exhibit growth, which offset NIM pressure and led to a 0.7% QoQ increase in net interest income. Meanwhile, the Company’s core noninterest income (excluding securities gains) increased 1.9% QoQ, driven by higher levels of direct investment income and corporate finance products revenue. DBRS notes that Webster’s core noninterest income, at 24% of total revenues, is still a fairly modest contributor to earnings.

In DBRS’s view, expenses were well managed in the quarter and Webster remains committed to reaching a 60% core efficiency ratio by 4Q12. Excluding non-core items, QoQ expenses decreased 2.1% to $123.9 million, reflecting in part the seasonally higher compensation expense during 1Q12. Combined with revenue growth, Webster’s core efficiency ratio continues to improve, down 188 bps to 63.75% (Company calculated) at June 30, 2012.

While credit metrics remain worse than pre-crisis levels, the trend in credit remains positive in DBRS’s view, and provisioning needs have been quite low for the past several quarters. NPAs contracted to 1.50% of total loans (excluding performing troubled debt restructurings) at June 30, 2012, down from 1.63% at March 31, 2012. Residential mortgages, commercial & industrial, and consumer loans represented the bulk of NPLs at the end of 2Q12. Meanwhile, net charge-offs (NCOs) decreased 39% from 1Q12 to $16.5 million due to the decline in commercial & industrial and commercial real estate loan credits, and represented 0.58% of average loans, down from 0.96% in 1Q12. With a provision that was $11.5 million below quarterly NCOs, Webster’s loan loss reserves declined about 5.5% from March 31, 2012. That said, at 117% of NPLs and 1.72% of total loans, DBRS sees Webster’s loan loss reserves as adequate, especially given the sustained positive trends in NPLs.

In DBRS’s view, Webster’s capital provides solid loss absorption capacity, especially at current loss rates. At June 30, 2012, the Company’s tangible common equity ratio was 7.22% and its Tier 1 common equity ratio was a strong 10.95% (projected). DBRS sees current capital levels, which are comfortably above “well capitalized” guidelines as giving the Company good capacity for loan growth.

Webster’s funding profile also remains sound and is underpinned by an ample core deposit base. Deposits inched up by 0.2% from 1Q12 to $13.9 billion at June 30, 2012 and the mix improved, as demand and interest checking deposits increased and certificates of deposits declined. Webster’s securities portfolio, which represents an above-peer 32.1% of total assets, along with access to the Federal Home Loan Bank and the Federal Reserve round out the Company’s liquidity profile.

Webster, a financial holding company headquartered in Waterbury, Connecticut reported $19.4 billion in assets as of June 30, 2012.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating includes company documents, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Mark Nolan
Rating Committee Chair: Roger Lister
Initial Rating Date: 30 May 2006
Most Recent Rating Update: 18 January 2011

For additional information on this rating, please see the linking document under Related Research.