KBRA Affirms Ratings for Byline Bancorp, Inc.

7 Jun 2024   |   New York


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 continue to be supported by Byline’s stronger earnings capacity that has persisted throughout various interest rate cycles, which is reinforced by an asset sensitive balance sheet and its government guaranteed business that naturally offset each other in higher or lower interest rate environments. This has resulted in favorable returns in recent operating history, including core ROA that has averaged above 1.2% from 2019-2023. In more recent periods and during a more challenging interest rate environment, BY has significantly outperformed, with NIM and ROA well-above its rated peer average, though KBRA acknowledges that the company benefits from a meaningful amount of PAA income (added 22 bps to NIM during 2023). While PAA income is expected to decline and could result in potential NIM compression, we believe that Byline’s earnings will remain solid and comfortably above peers prospectively. Moreover, it is worth noting that BY has maintained peer leading profitability despite reflecting above average credit costs, with provisions to average assets averaging ~40 bps over the last five years, which are largely tied to NCOs from unguaranteed SBA/USDA loans on-balance sheet (6% of loans). Despite headwinds facing these borrowers from higher rates, we believe that the risk-adjusted margins remain favorable. KBRA also positively views BY's revenue diversity, with noninterest income averaging ~20% of revenues the last five years. As noted, rising rates have impacted government guaranteed volume, though fee income has remained respectable at ~15% of revenues in recent quarters despite the lower GoS activity. The company’s credit quality metrics are typically weaker than average, which is reflective of the higher risk credit profile, notably the SBA/USDA loans, though have also been attributable to PCD loans. When excluding those categories, the NPA and NCO ratios for the conventional loan portfolio have been relatively sound and in line with peers. KBRA believes that BY is well positioned for the headwinds facing the industry given its below average investor CRE concentration (170% of total risk-based capital), notably, a minimal office portfolio (3% of loans). Byline has also reported respectable core deposit growth (excluding deposits from acquisitions) in recent years despite liquidity leaving the banking system as a part of the Fed's tightening measures. While this has certainly come with higher-costs, the overall deposit beta has not been materially outsized relative to similarly rated peers, which is impressive given that BY is situated in the competitive Chicago metro region. Altogether, the funding and liquidity profile remains adequate for the rating category and for Byline's business model. The company's risk-based capital measures continue to track below average, which is due to its commercially focused loan portfolio (higher RWAs), though management intends to grow the CET1 ratio to above 11% over time (10.6% as of 1Q24). Moreover, this is partially offset by a historically stronger-than-peer TCE ratio, which was 8.7% as of 1Q24 (9.8% excluding negative AOCI). We also acknowledge that the company is being led by a seasoned management team, with bigger bank experience, that has a strong track-record with regard to organic growth, which has effectively integrated prior acquisitions, and has proactively prepared the institution for reaching the $10 billion-asset threshold and beyond.

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Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

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