TCF Financial Corporation -- Moody's affirms Huntington Bancshares' ratings (Baa1 senior unsecured) and reviews TCF Financial's ratings (Ba1(hyb) preferred stock) for upgrade, following merger announcement
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Rating Action: Moody's affirms Huntington Bancshares' ratings (Baa1 senior unsecured) and reviews TCF Financial's ratings (Ba1(hyb) preferred stock) for upgrade, following merger announcement
Global Credit Research - 14 Dec 2020
New York, December 14, 2020 -- Moody's Investors Service (Moody's) has affirmed the long-term and short-term ratings and assessments of Huntington Bancshares Incorporated (Huntington, long-term senior unsecured Baa1), including the a3 standalone Baseline Credit Assessment (BCA), of its lead bank, Huntington National Bank (long-term deposits Aa3), following its announcement that it has agreed to acquire TCF Financial Corporation. The rating outlook for Huntington remains stable. However, Moody's has changed the outlook on Huntington National Bank's long-term deposit, senior unsecured debt and issuer ratings to negative, from stable, based on Moody's view that recent deposit growth and changes in the banks' balance sheet as a result of the acquisition may reduce the amount of unsecured debt on Huntington's balance sheet, a key input in Moody's Loss Given Failure analysis, resulting in a lower degree of protection for its creditors.
In the same action, Moody's has placed on review for upgrade all long-term ratings of TCF Financial Corporation (TCF, noncumulative preferred stock Ba1(hyb)) as well as the long-term ratings and assessments, including the baa1 BCA, of its lead bank, TCF National Bank (long-term deposits A2). TCF National Bank's Prime-2(cr) short-term counterparty risk assessment was placed on review for upgrade. The bank's other short-term ratings were affirmed.
"With the TCF acquisition, Huntington will become one of the largest regional banks in the US, gaining market positions in its key midwest market and strengthening the banks' national lending businesses" said Rita Sahu, Vice President - Senior Credit Officer. "Although the acquisition introduces significant operational and integration risks, we have affirmed Huntington's ratings based on the bank's credit fundamentals and strong acquisition track record," Ms. Sahu added.
A complete list of affected ratings and entities within both banking groups can be found at the end of this press release.
RATINGS RATIONALE
The rating actions for Huntington and TCF follows the banks' announcement that they will merge in an all-stock transaction. Huntington and TCF had total assets of $120 billion and $48 billion, respectively, as of 30 September 2020 and the combined company will operate under the Huntington name. Huntington' shareholders will have an ownership stake of approximately 69% of the merged company.
The transaction combines two midwestern US retail and commercial banking franchises along with national lending businesses. TCF's footprint overlaps with Huntington's but also includes contiguous and noncontiguous regional markets. The banks indicated that they expect cost savings to equal 37% of TCF's noninterest expense base by 2023, which is substantial.
The combined bank will benefit from increased loan diversification by asset class and geography, as both banks run traditional regional bank in-footprint lending businesses and national businesses. Huntington has been a long-established participant in indirect automobile and recreational vehicle lending and has a smaller equipment finance portfolio. TCF has sizeable national equipment and inventory financing businesses. The combination will also increase scale and penetration in deposits with the combined organization having a top five deposit market share in approximately 69% of the metropolitan statistical areas in which it operates.
Moody's stated that the proposed merger with TCF is a large undertaking for Huntington given that TCF's total assets equaled about 40% of Huntington's at 30 September 2020, which introduces significant operational and integration risks. However, Moody's recognizes Huntington's and TCF's good acquisition integration track records. In 2016, Huntington completed the acquisition of FirstMerit Corporation, which was also large, equaling about 36% of Huntington's assets at the time. TCF completed a merger of equals with Chemical Financial Corporation (Chemical) in 2019. Still, until the acquisition has been integrated, Huntington's risk profile will be heightened, particularly as the economic fallout from the coronavirus pandemic is not yet fully known. The rating agency may reevaluate its assessment of the transaction prior to closing should the performance of either company deteriorate beyond expectations in the coming quarters, against the backdrop of uncertain operating conditions due to the ongoing coronavirus pandemic.
Following the ratings affirmation, Huntington's outlook remains stable. However, Moody's has changed the outlook on Huntington National Bank and on its long-term deposit, senior unsecured debt and issuer ratings to negative from stable, based on its view that recent deposit growth and the planned acquisition may reduce the amount of unsecured debt on Huntington's balance sheet. This is a key input to Moody's advanced Loss Given Failure analysis, which could result in a lower degree of protection for the bank's creditors.
At the same time, Moody's has placed TCF's BCA and ratings on review for upgrade because it believes that its creditors may benefit from the merger. TCF's BCA reflects the bank's solid balance sheet, supported by its large, low-cost funding base, improved liquidity, stable asset quality and adequate capitalization. The BCA also reflects TCF's healthy core profitability despite recent pressure from low interest rates and expenses related to the merger between TCF and Chemical in August 2019. TCF's above peer-average growth of certain national lending businesses in recent years and its commercial real estate concentration are credit challenges despite generally good asset quality performance. Huntington expects to recognize a gross credit mark of 2.4% of TCF's loans.
Moody's review is unlikely to conclude until after the deal has received regulatory approvals and the transaction closes. The banks' management teams anticipate this will occur in the second quarter of 2021.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
For Huntington, upward rating pressure on the BCA and ratings could arise from an increase in capitalization or significantly higher levels of profitability relative to similarly rated peers. A sustained improvement in market funding and liquid assets would also be positive for the BCA and ratings.
Huntington's BCA and ratings could be downgraded if missteps in the integration of TCF occur or if there was a material increase in problems loans or credit losses inconsistent with Moody's current expectations at either entity. Evidence of weakening in underwriting standards, lower capitalization or an increase in confidence-sensitive market funding reliance would also be negative.
For TCF, Moody's review for upgrade will focus on the benefits to creditors of the proposed combination, specifically the benefits of the increased scale and more diverse franchise. Given the direction of the ratings review, rating downgrades are unlikely over the next 12-18 months.
The principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Affirmations:
..Issuer: Huntington Bancshares Incorporated
....Pref. Stock Non-cumulative, Affirmed Baa3(hyb)
....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1, Stable
....Subordinate Regular Bond/Debenture, Affirmed Baa1
....Pref. Shelf Non-cumulative, Affirmed (P)Baa3
....Senior Unsecured Shelf, Affirmed (P)Baa1
....Subordinate Shelf, Affirmed (P)Baa1
..Issuer: FirstMerit Corporation
....Subordinate Regular Bond/Debenture, Affirmed Baa1
..Issuer: FirstMerit Bank, N.A.
....Subordinate Regular Bond/Debenture, Affirmed Baa1
..Issuer: Huntington Bancshares Capital Trust I
....Backed Pref. Stock, Affirmed Baa2(hyb)
..Issuer: Huntington Capital II
....Backed Pref. Stock, Affirmed Baa2(hyb)
..Issuer: Huntington National Bank
....Adjusted Baseline Credit Assessment, Affirmed a3
....Baseline Credit Assessment, Affirmed a3
....LT Counterparty Risk Assessment, Affirmed A2(cr)
....ST Counterparty Risk Assessment, Affirmed P-1(cr)
....LT Counterparty Risk Rating (Local Currency), Affirmed A3
....ST Counterparty Risk Rating (Local Currency), Affirmed P-2
....LT Counterparty Risk Rating (Foreign Currency), Affirmed A3
....ST Counterparty Risk Rating (Foreign Currency), Affirmed P-2
....LT Issuer Rating, Affirmed A3, Negative from Stable
....Senior Unsecured Regular Bond/Debenture, Affirmed A3, Negative from Stable
....LT Bank Deposits, Affirmed Aa3, Negative from Stable
....ST Bank Deposits, Affirmed P-1
..Issuer: TCF National Bank
....ST Counterparty Risk Rating (Local Currency), Affirmed P-2
....ST Counterparty Risk Rating (Foreign Currency), Affirmed P-2
....ST Bank Deposits, Affirmed P-1
On Review for Upgrade:
..Issuer: TCF Financial Corporation
....Pref. Stock Non-cumulative, Placed on Review for Upgrade, currently Ba1(hyb)
..Issuer: TCF National Bank
....Adjusted Baseline Credit Assessment, Placed on Review for Upgrade, currently baa1
....Baseline Credit Assessment, Placed on Review for Upgrade, currently baa1
....LT Counterparty Risk Assessment, Placed on Review for Upgrade, currently A3(cr)
....ST Counterparty Risk Assessment, Placed on Review for Upgrade, currently P-2(cr)
....LT Counterparty Risk Rating (Local Currency), Placed on Review for Upgrade, currently Baa1
....LT Counterparty Risk Rating (Foreign Currency), Placed on Review for Upgrade, currently Baa1
....LT Issuer Rating, Placed on Review for Upgrade, currently Baa2, Rating Under Review from Stable
....Subordinate Regular Bond/Debenture, Placed on Review for Upgrade, currently Baa2
....LT Bank Deposits, Placed on Review for Upgrade, currently A2, Rating Under Review from Stable
Outlook Actions:
..Issuer: Huntington Bancshares Incorporated
....Outlook, Remains Stable
..Issuer: Huntington National Bank
....Outlook, Changed To Negative From Stable
..Issuer: TCF Financial Corporation
....Outlook, Changed to Rating Under Review from No Outlook
..Issuer: TCF National Bank
....Outlook, Changed To Rating Under Review From Stable
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued the ratings.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Rita Sahu, CFA VP - Senior Credit Officer Financial Institutions Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 M. Celina Vansetti-Hutchins MD - Banking Financial Institutions Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Joseph Pucella Senior Vice President Financial Institutions Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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