DBRS Confirms Webster Financial Corporation at BBB; Maintains Stable Trend, Then Withdraws Ratings

DBRS, Inc. (DBRS) has today confirmed the ratings of Webster Financial Corporation (Webster or the Company), and its related entities, including Webster’s BBB Issuer & Senior Debt rating. At the same time, DBRS maintained the Stable trend on all ratings. Subsequent to the confirmation, DBRS withdrew the ratings of Webster. The decision to withdraw the ratings was made at DBRS’s discretion.

Ratings reflect Webster’s well-entrenched banking franchise that includes ample deposit market shares in its key central Connecticut MSAs. Funding remains strong and is underpinned by a sizable core deposit base, which supports sustained loan growth. Furthermore, Webster’s solid capital position provides additional support for asset growth.

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. Although pressured by the difficult operating environment, Webster’s core earnings generation continues to track positively, driven by a growing loan portfolio and a well-controlled expense base. Overall, DBRS continues to see Webster as well-placed in its current rating category.

For 1H14, Webster reported $93.0 million in earnings available to common shareholders, up 12.1% over the same period last year, reflecting strong average loan growth and well managed expenses. Indeed, a 7.9% increase in average loans led to a 6.0% increase in spread income, despite a one bp narrowing of net interest margin. Importantly, loan growth was sustained, especially commercial & industrial loans, and to a lesser extent commercial real estate loans. Meanwhile, total non-interest income for 1H14 declined 3.1% year-on-year (YoY), primarily due to lower mortgage banking income. Excluding securities gains and other non-core items, core noninterest income, declined 8.2%, YoY (DBRS calculated). DBRS notes that at 23% of adjusted total revenues, adjusted fee income remains a relatively modest contributor to earnings, and a constraint to the rating. Finally, Webster’s 1H14 adjusted expenses were well managed and modestly down from 1H13.

Credit quality continues to improve, reflecting contracting levels of non-performing assets (NPAs) and net charge-offs (NCOs). Specifically, NPAs totaled 1.14% of total loans at June 30, 2014, down from 1.56% at June 30, 2013. Meanwhile, NCOs represented a very low 0.24% of average loans for 2Q14, down from 0.43% for 2Q13. Provision expenses have edged up in recent quarters due to loan growth. Finally, DBRS sees Webster’s loan loss reserves at 1.17% of loans as adequate, especially given the sustained positive trends in non-performing loans.

In DBRS’s view, Webster’s capital position remains solid and gives the Company good capacity for growth and loss absorption. Specifically, at June 30, 2014, the Company’s tangible common equity ratio was 7.62% and its Tier 1 common equity ratio was approximately 11.37%.

Webster’s funding profile remains sound and is underpinned by an ample core deposit base. During 1H14, average deposits increased 3.3%, over the comparable period in 2013. Moreover, the mix improved, as demand, and savings/interest checking/money market deposits increased, while certificates of deposits declined. Webster’s securities portfolio, which represents 30% of total assets, along with access to the Federal Home Loan Bank, round out the Company’s liquidity profile.

Webster, a financial holding company headquartered in Waterbury, Connecticut reported $21.5 billion in assets as of 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: Mark Nolan
Rating Committee Chair: Will Schwartz
Initial Rating Date: 30 May 2006
Most Recent Rating Update: 13 November 2013

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