Fitch Affirms Bank of the Wests Long-Term IDR at A; Outlook Stable

Fitch Ratings has affirmed Bank of the West’s (BOW) Long-Term Issuer Default Rating (IDR) at ‘A’. The Rating Outlook for the Long-Term IDR is Stable. Fitch has also affirmed BOW’s Viability Rating (VR) at ‘a-‘. BOW is a wholly-owned subsidiary of BNP Paribas.

This action follows Fitch’s recent rating action on BOW’s ultimate parent company, BNP Paribas (BNPP). Please refer to Fitch’s press release titled ‘Fitch Affirms BNP Paribas at ‘A+’; Outlook Stable,’ dated June 14, 2016 for additional information on the BNPP rating action. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS – IDRs

BOW’s IDRs are linked to that of their 100% owner, BNP Paribas (BNPP). BOW’s IDR reflects the higher of its support-driven IDR or its standalone rating, the VR. BOW’s support-driven IDR is ‘A’, while its stand-alone rating or VR is ‘a-‘. BOW’s institutional support-driven IDR is higher than its VR, reflecting its important role in the group.

Fitch believes that BNPP has the ability and propensity to provide support to BOW.

KEY RATING DRIVERS – VR

On April 1, 2016, following an internal re-organization of BancWest Corporation, BOW was transferred to a newly created holding company, BancWest Holding Inc, which is not currently rated by Fitch. At the same time, its former sister bank, First Hawaiian Bank (FHB) became part of First Hawaiian, Inc.

The re-organization into two separate holding companies was in preparation for regulatory rules governing FBOs that require the creation of an intermediate holding company by July 1, 2016, as well as the pending strategic alternatives BNPP is pursuing with regard to FHB. Both BancWest Holding Inc. and First Hawaiian, Inc. are wholly owned subsidiaries of BNPP. Revenues out of North America, which includes both of these holding companies and U.S.-based broker dealers, accounted for 12% of BNPP’s consolidated revenues in 2015.

Prior to the re-organization on April 1, both BOW and FHB were subsidiary banks of BancWest Corporation (not currently rated by Fitch) and carried a common VR, as U.S. banks are cross-guaranteed under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). Since BOW and FHB are no longer under the same holding company structure, BOW no longer benefits from the cross-guarantees under FIRREA, and its VR is now based on its own individual credit profile.

BOW’s VR was affirmed ‘a-‘ primarily due to the strength of its capital profile, and good asset quality. Further, Fitch views favorably BOW’s franchise, with the 6th highest deposit market share in the economically diverse state of California, and 2nd highest deposit market share in Contra Costa County, which comprises around 15% of BOW’s deposit base. In addition, BOW is one of the largest agricultural and Marine/RV lenders in the U.S.

These rating strengths are offset by its weaker earnings profile, and strong loan growth over the past few years, particularly in C&I, non-owner occupied CRE, and auto lending. Lastly, BOW’s funding profile includes a higher reliance on short-term funding, and an elevated loan-to-deposit ratio.

At March 31, 2016, BOW’s estimated Common Equity Tier 1 ratio was 13.2%, well above the peer average and median for large regional banks of roughly 11.2%. BOW’s strong capital position provides rating support, and an appropriate level of protection for unexpected losses. Further, Fitch expects capital will be managed conservatively at BOW given its parent company’s upcoming participation in the annual regulatory stress testing. Other FBOs have had a challenging time with first-time CCAR submissions due to qualitative concerns. However, Fitch notes there is very little visibility into this risk.

BOW’s asset quality continues to improve with lower levels of nonaccrual balances and still benign credit costs. Following the crisis, NCOs peaked at 1.96% in 2009, which compared well to the large regional peer average of around 2.4% for the same period. Fitch attributes some of the better than peer performance to the lack of external shareholder pressure which lends support to a more conservative risk appetite. However, Fitch expects that loan losses will deteriorate for BOW, as well as the industry, from currently unsustainably low levels.

Offsetting these rating strengths, the bank’s earnings profile generally lags the large regional bank peer average. BOW reported an ROAA of approximately 90bps in 1Q16 and for the full-year 2015, which is below the peer average. First quarter earnings benefitted from sizeable securities gains. Excluding these gains, Fitch calculates an adjusted ROAA of around 70bps during the 1Q16, as compared to the large regional peer median of roughly 93bps.

BOW’s earnings profile is largely dependent on spread income, accounting for approximately 80% of total revenue. As a comparison, large regional banks, on average, derive roughly 40% of revenues from non-interest income. This reliance, paired with the current low rate environment, has placed pressure on BOW as low-yielding assets mature and are replaced with even lower-yielding assets. Earnings have also been impacted by investments in strategic initiatives, including private banking expansion, and in small business and corporate segments, along with investments in IT, compliance, and risk. Fitch expects profitability to remain relatively flat given the current rate environment with the potential to trend down as the loan portfolio seasons and the company increases loan loss provision expenses.

Fitch notes loan growth in 2014 and 2015 outpaced that of peers, particularly within the C&I, non-owner occupied CRE and auto loan asset classes. Loan growth within the C&I book during these two years has been approximately 50%, a considerable increase in both absolute and relative terms. Given this high level of growth and Fitch’s concerns regarding the competitive environment for C&I lending, the agency will monitor this growth for any asset quality deterioration. Depending on the pace and relative deterioration in this portfolio, this may have VR implications given the overall size of the C&I book.

Regulators have been citing industry concerns about CRE and auto lending, and given BOW’s recent growth in these two additional asset classes, this also may impact the bank’s VR in the future.

BOW is unique among peers as one of the largest agricultural lenders in the U.S., comprising around 4% of total loans for BOW. Fitch notes that while the U.S. agriculture economy began softening in mid- to late-2014 as commodity prices fell, affecting farmland values and lending within the sector, Fitch expect BOW to largely withstand this slowdown. The agency believes the forecast rate environment and existing leverage in the sector should mute the potential adverse impact of a softer farm economy.

BOW’s loan portfolio also includes consumer installment loans (approximately 18% of loans at March 31, 2016); most of which are RV/Marine loans. These loans performed well during the financial crisis according to management. BOW is a leading lender in RV/marine lending in the U.S.

Also constraining the bank’s VR, relative to peers, is BOW’s reliance on short-term wholesale funding, which is high. At March 31, 2016, short-term wholesale funding as a percentage of total funding totaled around 11% versus the large regional average of around 5%. Largely driving BOW’s elevated short-term wholesale funding is the company’s use of FHLB advances, and to a lesser extent, repurchase agreements. While this exposure is noticeably higher than that of peers, Fitch views the liquidity profile as adequate, as deposits remain the primary funding source.

BOW does not have any outstanding public debt, and given internal TLAC rules, Fitch does not anticipate BOW issuing external debt in the future.

BOW has historically operated with an elevated loan-to-deposit (LTD) ratio. At year-end 2016, the company’s LTD ratio was approximately 100% versus the large regional average of 90%. Fitch notes that the higher relative LTD gives BOW less flexibility to fund its assets with lower-cost deposits than its peers, especially under a rising interest rate environment. Fitch expects that BOW will bring its LTD ratio closer to 90% by year-end 2016.

KEY RATING DRIVERS – SUPPORT RATING AND SUPPORT RATING FLOOR

BOW’s Support Rating of ‘1’ reflects the high probability of support from its parent, BNPP. BOW’s support-driven IDR has historically been one notch below BNPP, reflecting Fitch’s view that BOW is strategically important to BNPP, though not core.

Since these support ratings based on institutional support, as opposed to sovereign support, there is no Support Rating Floor assigned.

KEY RATING DRIVERS – LONG- AND SHORT-TERM DEPOSIT RATINGS

BOW’s long-term deposit ratings are one notch higher than the company’s IDR, which reflect depositor preference for the U.S. banks, and the superior recovery prospects for deposits resulting from depositor preference. BOW’s short-term deposit rating at ‘F1’ is linked to the Long-Term IDR per Fitch’s rating criteria, and as such, are sensitive to changes in the company’s IDR.

RATING SENSITIVITIES – IDRs

BOW’s IDR is directly linked to that of BNPP. Should BNPP’s IDR change, the IDRs of BOW would also be affected. Additionally, if BNPP’s ability or propensity to support BOW changes, its IDR could be reviewed for rating action.

RATING SENSITIVITIES – VR

Fitch believes that the VRs have limited upside over the near to intermediate term, absent a material improvement in the company’s earnings profile, which Fitch views as unlikely.

Conversely, negative pressure on the VR may occur in the event of capital deterioration as the strength of the bank’s capital position supports the VR. Fitch expects BOW and its parent will manage capital conservatively over the near term given the formation of an IHC, the inclusion of BNPP’s U.S.-based broker dealer, and the participation in annual CCAR stress testing. If capital were to decline materially, BOW’s VR would likely be downgraded.

RATING SENSITIVITIES – SUPPORT RATING AND SUPPORT RATING FLOOR

BOW’s Support Rating is sensitive to a number of factors, including but not limited to: the strategic importance of the financial institution to BNPP; degree of integration with a parent; guarantees and commitments provided by the parent; percentage ownership or control; jurisdiction; track record of support; cost of support; the nature of the owner; and the importance of the franchise to the owning institution.

RATING SENSITIVITIES – LONG- AND SHORT-TERM DEPOSIT RATINGS

BOW’s long-term deposit ratings are one notch higher than the company’s IDR, which reflect depositor preference for the U.S. banks, and the superior recovery prospects for deposits resulting from depositor preference. BOW’s short-term deposit rating at ‘F1’ is linked to the Long-Term IDR per Fitch’s rating criteria, and as such, are sensitive to changes in the company’s IDR.

Fitch has affirmed the following ratings:

Bank of the West

–Long-Term IDR at ‘A’; Outlook Stable;

–Short-Term IDR at ‘F1’;

–Viability Rating at ‘a-‘;

–Support Rating at ‘1’;

–Long-Term Deposits at ‘A+’;

–Short-Term Deposits at ‘F1’.

Applicable Criteria

Exposure Draft: Global Bank Rating Criteria (pub. 14 Apr 2016)

Global Bank Rating Criteria (pub. 20 Mar 2015)

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

Solicitation Status

Endorsement Policy