KBRA Upgrades Ratings for Byline Bancorp, Inc.

KBRA upgrades the senior unsecured debt rating to BBB+ from BBB, upgrades the subordinated debt rating to BBB from BBB-, and upgrades the short-term debt rating to K2 from K3 for Chicago, Illinois-based Byline Bancorp, Inc. (NYSE: BY) ("Byline" or "the company"). In addition, KBRA upgrades the deposit and senior unsecured debt ratings to A- from BBB+ and upgrades the subordinated debt rating to BBB+ from BBB for its main subsidiary, Byline Bank ("the bank"). Moreover, KBRA affirms the short-term deposit and debt ratings of K2 for the bank. The Outlook for all long-term ratings is revised to Stable from Positive following the upgrade.

The rating upgrade is supported by Byline’s strong and resilient earnings capacity across various interest rate environments, including the current cycle, where it has demonstrated top-quartile profitability (ROA of 1.3% during 2024) within the KBRA-rated bank universe. While the company’s asset-sensitive balance sheet has contributed to its favorable performance during the more elevated interest rate environment over the past few years, KBRA believes that its business model also incorporates countercyclical elements. Specifically, its government lending division, which includes primarily the origination and sale of guaranteed SBA 7(a) loans, provides substantial revenue tailwinds in a declining rate environment, driving increased gain-on-sale activity, as evidenced in 2021. Additionally, management has proactively shifted the balance sheet toward a more neutral interest rate risk position to mitigate the impact of further Fed rate cuts following the 100 bp reduction in 2H24. Given these factors, we believe Byline’s earnings should remain durable and continue to rank at the higher end of the rating group moving forward. KBRA also acknowledges the respectable amount of revenue diversification, though notes that it remains primarily driven by lending activities and gain-on-sale income from the government lending team. However, this business line has also demonstrated resilience throughout various interest rate cycles and has proven to be less volatile than mortgage banking. While noninterest income as a percentage of total revenue appears to track below the peer group average (15% in 2024), when measured relative to average assets—given BY’s above-peer NIM (4.0% during 2024)—fee income aligns closely with other similarly rated banks at just over 0.6% of average assets.

We also view the increasingly conservative posture with respect to core capital management in recent years favorably (CET1 ratio of 11.7% at YE24), with positive trends expected to continue throughout 2025. Stronger organic growth opportunities or M&A activity could temporarily impact ratios; however, we believe that they would be restored quickly, returning to recent year levels. With that said, risk-based measures continue to track slightly below the rating group average, in part, due to BY’s commercial focus and emphasis on C&I lending (higher level of unfunded commitments and, in turn, higher RWAs). Overall, we view management's capital targets as suitable for the rating group and risk profile of the company, especially considering its above peer earnings capacity as the first line of defense against unexpected credit costs or other expense-related issues. Additionally, BY has a greater ability to generate internal capital via retained earnings given its stronger profitability and fairly low dividend payout ratio, which was 14% during 2024.

Credit quality metrics—reported NPA and NCO ratios—have generally been slightly weaker than peers, reflecting a higher risk profile, particularly within the government lending division as unguaranteed portions of SBA/USDA loans are maintained on-balance sheet at ~6% of total loans. However, asset quality measures have also been impacted by purchased credit deteriorated loans from prior acquisitions. While the government lending segments generally carry higher credit costs, appropriate loan pricing more than offsets the risk, as reflected in Byline’s strong margins and returns over the years. However, excluding these, the NPA and NCO ratios for the conventional loan portfolio have remained relatively sound and in line with peers. KBRA also believes that BY is well positioned for the potential headwinds facing the industry given its below average investor CRE concentration (154% of total risk-based capital as of YE24), notably a minimal office portfolio (2% of loans). Moreover, with respect to the possible risk factors emanating from the current higher interest rate environment, we acknowledge that Byline's loan portfolio has largely repriced, already reflecting these impacts due to its focus on C&I lending and shorter tenors on fixed-rate loans, resulting in an average loan book life of approximately three years. The operating footprint is more concentrated than larger peers, primarily within the Chicago MSA. However, its national lending channels provide meaningful diversification. We view this as adequate within the rating group and positively note that BY operates in strong and diversified economies.

Byline’s funding mix is slightly weaker than that of its peers, characterized by a modestly higher reliance on noncore funding and a deposit base that is more concentrated in rate-sensitive products. Combined with its presence in competitive markets, this ultimately results in a higher cost of funds (total deposit costs of 2.48% during 4Q24). Additionally, while we view liquidity management as adequate in the context of the business model, the balance sheet is more leveraged than peers, with higher ratios of loans to earning assets and loans to core deposits.

The ratings also reflect Byline’s solid strategic execution over the years, including a proven track record of integrating acquisitions and driving organic growth. This is supported by a strong management team and board of directors, with approximately 30% insider ownership—a factor we view as a credit strength. We also acknowledge the proactive steps taken in preparation for surpassing the $10 billion asset threshold, including investments in infrastructure, risk systems, and talent.

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