KBRA Affirms Ratings for Hilltop Holdings 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 Dallas, Texas based Hilltop Holdings Inc. (NYSE: HTH) (“Hilltop” or “the company”). Additionally, 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 lead bank subsidiary, PlainsCapital Bank (“PCB” or “the bank”). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by KBRA’s view of Hilltop's management, which is considered a core strength of the organization supported by capable executives within the operating subsidiaries. Both executive management and business segment management are well tenured and have a positive track record. Further supporting the ratings is continued maintenance of the company’s strong consolidated capital position, which is among the highest in KBRA’s rated universe. Given the company’s capital levels, coupled with minimal balance sheet growth and lower, though positive, capital generation through retained earnings, KBRA expects the prospective capital profile to remain at or above current levels and in excess of similarly rated peers. KBRA also considers positively the synergies between the various business lines, both in the context of efficiencies as well as the overall risk profile, as well as a degree of countercyclicality within the revenue streams of the business segments under normal operating conditions historically. We also consider the company's liquidity position beneficial to the credit profile, which includes a defensible deposit franchise and substantial access to contingent sources, though not without cost. Ratings are constrained by the current headwinds to earnings performance, particularly those generated out of PrimeLending, which will likely remain a drag on consolidated earnings due to the expectation for less favorable operating dynamics in mortgage banking, as well as the likely limitations to further rationalize expenses meaningfully without damaging the PrimeLending franchise. Hilltop's NIM is likely to remain under pressure as function of funding considerations, in common with the broader industry. Taken together, we consider HTH's earning power to be comparatively thin relative to both peers and to the company's historic trends. Moreover, despite stable conditions currently, asset quality at PCB could come under pressure due to a downturn in economic operating conditions. We consider Hilltop's loss absorbing capacity to be limited on a first line of defense basis due to aforementioned lower earnings power, though acknowledge that there remains considerable loss absorption capacity through the company's capital position. Further, ratings remain constrained by geographic concentration within the banking franchise as compared with larger, regional financial institutions. Additionally, KBRA considers growth prospects for the banking franchise to be limited through the medium term, save for acquisition activity. With a signficant portion of consolidated revenue generated from business segments that generally fair better under lower interest rates historically, the capacity for NII to offset these declining sources is limited by the comparatively smaller PCB franchise, as has been observed thus far in the current cycle.

Rating Sensitivities

Given that HTH's ratings are currently at the upper end of KBRA’s rated bank universe, the likelihood of positive rating momentum is remote through the medium term. However, a meaningful increase in diversification and scale of the banking franchise and broker-dealer could provide positive momentum for ratings over time. Conversely, given the diminishment in earnings power generated from PrimeLending, HTH’s first line of defense for loss absorption capacity is substantially thinner. As such, the acuity around indications of outsized weakness in asset quality is more likely to put downward pressure on ratings in short order. Further, a more aggressive capital posture, beyond current levels, could pressure ratings as this represents one of the primary considerations for HTH’s above average ratings.

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Methodologies