DBRS Confirms City National Corporation at “A”; Trend Stable

DBRS, Inc. (DBRS) has today confirmed the ratings of City National Corporation (City National or the Company) and its operating bank subsidiary, City National Bank (the Bank), including City National’s Issuer & Senior Debt rating at “A” and Short-Term Instruments rating at R-1 (low). At the same time, DBRS assigned a BBB (low) rating to the Company’s Preferred Stock. The trend for all ratings is Stable. The rating actions follow a detailed review of the Company’s operating results, financial fundamentals, and future prospects.

City National’s ratings reflect its strong private and business banking franchise that is underpinned by a robust low-cost deposit base, resilient earnings, and better-than-peer asset quality. The ratings also consider the low interest rate, slow growth economic environment which is pressuring core revenue growth, large loan relationships, and below-peer capital metrics. DBRS views City National as comfortably placed within its rating category.

In 2012, the Company grew net income 21% to $208.0 million reflecting positive operating leverage, as well as significant growth in average loans, average deposits, and assets under management and administration (AUM/A). Positively, City National continues to invest in the franchise through acquisitions, new office openings, new products, and better technology, all of which contributed to the growth seen in 2012. Despite all of the investments, expenses have been well controlled. Indeed, expenses only increased 2% in 2012 and would have declined excluding the two acquisitions.

Most recently, the Company reported net income attributable to common shareholders of $49.1 million for the first quarter, up from $47.2 million in 4Q12 and from $46.3 million a year ago. DBRS notes that 1Q13’s results included a $2.4 million dividend related to City National’s recent non-cumulative perpetual preferred stock issuance. Revenues contracted sequentially due to continued net interest margin (NIM) pressure and lower noninterest income, as the low interest rate, slow growth economic environment remains a headwind. Displaying resilient earnings power, the Company has now been profitable every quarter for the past 20 years. For 2013, City National expects modest net income growth in 2013 with loan and deposit growth offsetting net interest margin pressure and higher loan loss provisioning needs reflecting the loan growth, not asset quality deterioration.

City National has one of the top deposit franchises in the country, which contributes to the Company’s resilient earnings power through low-cost, stable funding, as well as excellent liquidity. At $22.4 billion, average total deposits easily fund the entire loan portfolio. Moreover, average core deposits comprised approximately 97% of total average deposits. In 1Q13, the Company’s total cost of funds was a very low 0.24%; one of the best in the industry.

DBRS views City National’s risk profile as well managed. Credit quality is strong and improving, but the loan portfolio does contain some larger loan relationships, as well as geographic concentration; with 79% of the loan portfolio residing in California. Excluding covered loans, nonperforming assets declined in 1Q13 and the Company once again benefited from $4.8 million of net recoveries. At $103.1 million, total nonperforming assets represent only 0.68% of total loans and leases and OREO compared to 0.81% at year-end. DBRS notes that construction loans comprised almost half of total nonaccrual loans, but this once troubled asset class has seen net recoveries in each of the past three quarters. City National has increased the scope of its specialty lending in recent months, so DBRS will monitor how prudently these newer asset classes are managed. At $282.3 million, the allowance for loan and leases losses remains sufficient at 1.86% of total non-covered loan and leases. Excluding the very high quality residential mortgage portfolio, the reserve would increase to a robust 2.52%.

DBRS notes that acquisitions, strong balance sheet growth, and dividend payments including a special dividend paid in 4Q12 have pressured capital metrics over the past year. As a result, capital metrics are now lagging those of similarly rated peers. Positively, City National’s earnings power can quickly rebuild capital with the Company’s tangible common equity to tangible assets ratio improving to 6.35% at 1Q13 from 5.89% in 4Q12. Meanwhile, all regulatory capital metrics improved as well and remain well above the minimum capital standards for “well-capitalized” institutions.

City National Corporation, a bank holding company headquartered in Los Angeles, California, reported $27.4 billion in assets at March 31, 2013.

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 applicable methodologies include the DBRS Criteria: Intrinsic and Support Assessments, DBRS Criteria: Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments, and DBRS Criteria: Rating Bank Preferred Shares & Equivalent Hybrids. These can be found can be found at: http://www.dbrs.com/about/methodologies

[Amended on June 17, 2014, to reflect actual methodologies used.]

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael Driscoll
Rating Committee Chair: William Schwartz
Initial Rating Date: 6 April 2005
Most Recent Rating Update: 2 March 2012

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