KBRA Affirms Ratings for Byline Bancorp, Inc.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Chicago, Illinois-based Byline Bancorp, Inc. (NYSE: BY) ("Byline" or "the company"). Additionally, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for its main subsidiary, Byline Bank. The Outlook for all long-term ratings is Positive.

The Positive Outlook and ratings are supported by Byline’s stronger earnings capacity relative to similarly rated peers, which has persisted throughout various interest rate cycles. The company is well positioned to take advantage of both higher and lower rate environments, with an asset sensitive balance sheet that generates steady NIM expansion in the former scenario, and a robust government guaranteed division reinforcing higher revenues in the latter. During this period of rising rates, BY’s profitability has been enhanced due to its C&I concentrated loan portfolio (64% of total loans; 61% of assets are variable rate), which has produced a significantly higher than average loan yield that has outpaced the rise in funding costs. Additionally, despite operating in a competitive metropolitan market, the company’s deposit betas have tracked below average given the maintenance of a favorable deposit mix, with noninterest-bearing accounts representing 34% of total as of 1Q23. Moreover, BY continues to reflect a respectable level of revenue diversity, with noninterest income averaging above 15% of revenues the past year despite rising rates resulting in moderately lower volume and GoS premiums within the government guaranteed business. While GoS of loans has fallen from peak levels in 2021, the decline in GoS activity has not been as precipitous as mortgage banking, which illustrates a comparative resiliency in that business. Moving forward, returns are likely to be pressured as deposit costs accelerate across the industry and cause NIM compression, though with ROA comfortably above peers entering this period, BY should be able to maintain healthier earnings prospectively. Byline’s credit quality metrics have been relatively weaker than peers, though have shown improvement in recent years. The higher NPA/NCO ratios are typically driven by the SBA/USDA loans on-balance sheet (unguaranteed portions representing just below 8% of loans), which we believe provide favorable risk-adjusted margins. With a minimal exposure to investor CRE/C&D, as well as a modest office portfolio (investor office properties comprise ~3% of total loans) that is largely operated in suburban markets, the company appears to be well positioned to endure any potentially weakening economic conditions. Moreover, with stronger earnings power, as well as a solid reserve/capital position (TCE excluding AOCI of 10% as of 1Q23), BY is better situated to absorb rising credit costs. With regard to funding and liquidity, the company experienced some core deposit outflows in 1Q23 during the uncertainty created following the regional bank failures. With that said, the outflows were manageable and relatively in line with most rated peers, with core deposits declining ~$175 million or 3% from YE22. Additionally, with cash and secured borrowing access of nearly $2.1 billion as of 1Q23, Byline's liquidity sources comfortably cover uninsured deposit balances. Furthermore, with a relatively granular deposit base, including just 28% of deposits being categorized as uninsured, which does not exclude collateralized deposits, the company appears to be somewhat insulated against significant deposit volatility. Moreover, the Positive Outlook also assumes the effective integration of the Inland Bancorp, Inc. acquisition, which is expected to close in 2Q23, that will provide a proportionately higher level of core deposits relative to total funding, as well as meaningful cost-saving opportunities that should enhance the overall earnings power of the institution. Given the uncertain operating environment, KBRA also expects capital ratios, specifically CET1, to continue to trend higher over the intermediate term. Lastly, the ratings and Outlook also reflect our favorable view of the management team, most of which have worked at larger institutions and provide a wealth of knowledge and experience.

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