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. The ratings action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

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. The ratings also reflect the Company’s improving earnings generation and positively trending, yet still pressured asset quality metrics.

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. To counteract this, the Company has focused on deepening its client relationships and investing in new products and technology in its deposit franchise (for example, e-checking and treasury services). Similar to most banks, Webster has looked to improve earnings generation while facing a challenging interest rate environment and sluggish economic environment. Webster’s growing loan portfolio, relatively stable NIM, and well controlled expense base have provided some momentum in growing net income in recent quarters although reserve releases have also aided that growth. That said, DBRS continues to see Webster well-placed in its current rating category. However, a sustained improvement in core profitability metrics could result in upward ratings pressure.

For the nine months ended September 30th, Webster reported $127.6 million in earnings available to common shareholders, up 3.5% over the same period last year. Higher revenues and lower expenses were partially offset by higher provision for loan losses, and preferred stock dividends. Loans and transaction deposits continue to exhibit growth, which offset NIM pressure and led to a 2.4% YoY increase in net interest income. Meanwhile, the Company experienced a broad based increase in non-interest income. DBRS notes that Webster’s core noninterest income, at 25% of total revenues, remains a relatively modest contributor to earnings.

Like many banking companies, Webster has also been focused on expense management and has made strides improving its efficiency ratio with further improvements targeted. YoY expenses for the nine month period decreased 2.0% to $371.4 million and the Company’s efficiency ratio has hovered just over 60% in recent quarters.

While credit metrics remain worse than pre-crisis levels, the trend in credit remains positive in DBRS’s view. Specifically, non-performing assets contracted to 1.48% of total loans (excluding performing troubled debt restructurings) as of September 30, 2013, down from 1.63% at YE12. Meanwhile, net charge-offs (NCOs) have stayed in a manageable range of 0.43% to 0.60% over the last five quarters. Provision expenses have inched up in recent quarters due to loan growth, and remained below NCOs. Nonetheless, DBRS sees Webster’s loan loss reserves at 1.26% of loans as adequate, given the sustained positive trends in non-performing loans.

In DBRS’s view, Webster’s capital position is solid. At September 30, 2013, the Company’s tangible common equity ratio was 7.37% and its Tier 1 common equity ratio was a strong 11.38%. 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. Through September 30, 2013, deposits increased by 3.23% since YE12 to $15 billion. Moreover, the mix improved, as demand and interest checking deposits increased and certificates of deposits declined. Webster’s securities portfolio, which represents an above-peer 31% of total assets, along with access to the Federal Home Loan Bank rounds out the Company’s liquidity profile.

Webster, a financial holding company headquartered in Waterbury, Connecticut reported $20.6 billion in assets as of September 30, 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 used include the DBRS Criteria: Intrinsic and Support Assessments, DBRS Criteria: Rating Bank Preferred Shares & Equivalent Hybrids, DBRS Criteria: Bank and Bank Holding Company Trust Preferred Securities, and DBRS Criteria: Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments. These can be found at http://www.dbrs.com/about/methodologies.

The primary 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.

[Amended on August 7, 2014, to reflect actual applicable methodologies used, sources of information, and endorsement for use in the European Union]

Lead Analyst: Mark Nolan
Rating Committee Chair: Will Schwartz
Initial Rating Date: 30 May 2006
Most Recent Rating Update: 30 July 2012

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