KBRA Affirms Ratings for BankUnited, Inc.

KBRA affirms the senior unsecured debt rating of A-, the subordinated debt rating of BBB+, and the short-term debt rating of K2 for Miami Lakes, Florida based BankUnited, Inc. (NYSE: BKU) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A, the subordinated debt rating of A-, and the short-term deposit and debt ratings of K1 for the bank subsidiary, BankUnited, National Association (“the bank”). The Outlook for all long-term ratings is Negative.

Key Credit Considerations

The Negative Outlook, in part, reflects the weakened earnings power and profitability trends (1H24 ROA of 0.57%) from the current high interest environment primarily due to BKU’s relatively weaker core funding model (70% core deposits / total funding) and earnings reliance on spread based revenue (90% total revenue). BKU’s core deposits have improved more recently, but it remains reliant on market priced wholesale funding with FHLB borrowings (12% total funding) and brokered deposits (14% total funding) which are market priced thus weighing on NIM which runs between 100-125 bps below peer averages. KBRA believes that the company’s ability to backfill the liability side of the balance sheet with core deposits over the intermediate term will continue to be a challenge due to the intense competition for deposits. Conversely, supportive of the credit is the low risk weighted balance sheet density (5-year average at 69%) relative to peer levels partially due to solid on balance sheet liquidity including cash and investment securities of 26% of total assets as of 2Q24. Also, the preponderance of the investment securities are recorded as available-for-sale with only a 5% unrealized loss associated with the MTM of the portfolio. BKU’s credit performance has historically reflected its conservative underwriting and proactive account monitoring with 5-year average NCOs of 20 bps. NPAs run at higher levels than peers due to the C&I, SBA, and 1-4 family segments which include a portion of government guarantees. Also balancing the portfolio is a materially lower concentration in investor CRE and C&D segments which are expected to underperform in an economic downturn. Capital levels are consistent with the rating category, although KBRA notes that management has historically returned a significant portion of earnings to shareholders in dividends and share buybacks. KBRA expects BKU to maintain capital at levels consistent with peer levels within the rating category.

Rating Sensitivities

The return to a Stable Outlook would require an improvement in the company’s core funding profile that is more consistent with historical levels and the rating category peers as well as an improvement in risk adjusted earnings performance similar to rating category peers. The inability to improve core funding and reduce the negative impact of funding costs on NIM and earnings over the intermediate term or deterioration in credit quality that would weigh on the company’s earnings power driving weakened capital could result in negative rating actions.

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