DBRS Confirms City National Corporation’s Senior Debt 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). 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 sound balance sheet. The ratings also consider a rapidly growing loan portfolio, some of which is in newer asset classes where the Company has added expertise, its large loan relationships, and below-peer capital metrics. DBRS also notes that City National is more reliant on spread income than many of its peers, but the Company does have a sizeable Wealth Management business that is generating improved returns.

Despite the difficult revenue environment that has all banks watching expenses closely, City National has continued to make investments in talent, technology, and systems to enhance franchise strength. In 1H14, the Company has added bankers primarily in San Francisco, San Jose, and New York City. Today, the two relatively new Manhattan offices offer all of the Company’s products with the exception of commercial real estate (CRE) lending and construction. The branches are primarily for branding, but branches are needed for small business clients, as well as preferred banking clients. Most recently, City National added five private client bankers to provide services in Ventura County and Santa Barbara County, as well as adding a small team in Florida to expand its entertainment division’s sports clientele in that state. All of these investments have contributed to the Company’s strong growth.

While DBRS is generally wary of outsized loan growth, much of the growth has been driven by the Company’s Specialty Lending groups, most of which have strong track records of managing risk. Specialty Lending includes Entertainment, Real Estate, Technology, Legal Services, Healthcare, as well as four national businesses (equipment leasing, asset-based lending, franchise finance, and mortgage warehouse banking). DBRS notes that the equipment finance company had immaterial losses during the downturn, while the asset-based lending portfolio had no losses. Meanwhile, in ten years of franchise lending, City National has incurred only one loss. As such, DBRS believes the Company will continue to maintain strong asset quality.

For 1H14, the Company reported net income attributable to City National of $121.2 million, an increase of 9% from 1H13, driven by robust, broad-based loan growth and much improved Wealth Management revenues. Importantly, the Company has been able to generate positive operating leverage in 1H14, with growth in both fee revenues and net interest income outpacing expense growth.

City National’s already top-tier deposit franchise continued to improve with 2Q14 average total deposits increasing 12% over the past year and easily funding the loan portfolio. Moreover, average core deposits comprised a very high 98% of total average deposits. With average noninterest bearing deposits comprising 61% of total average deposits, the Company has one of the lowest cost of funds in the industry, which contributes to its resilient profitability.

Asset quality is strong and is still improving. Indeed, excluding covered loans, nonperforming assets of $69.1 million represented just 0.37% of total loans and leases. During the second quarter, classified loans declined by over a third from already low levels. Meanwhile, net charge-offs were $3.6 million, or 0.08% of total loans and leases (annualized), but City National still has net recoveries of $0.5 million for 1H14. The allowance for loan and lease losses was $311.3 million, or 1.68% of total loans and leases. Excluding the Company’s well-secured residential mortgage portfolio that has had very immaterial losses over the years, the allowance improves to a very sound 2.28%.

Despite significant balance sheet growth, capital metrics remain sound, but trail those of similarly rated peers. Specifically, at June 30, 2014, the Company’s tangible common equity ratio was 6.32% and has been relatively stable over the past year but trails the peer median of 8.9%. Positively, City National is already compliant with Basel III capital requirements.

City National Corporation, a bank holding company headquartered in Los Angeles, California, reported $30.8 billion in assets at June 30, 2014.

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 (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). 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.

Lead Analyst: Michael Driscoll
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 6 April 2005
Most Recent Rating Update: 23 May 2013

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