KBRA Affirms Ratings for The Bancorp, Inc.
4 Aug 2023 | 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 Wilmington, Delaware based The Bancorp, Inc. (NASDAQ: TBBK) (“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 the lead subsidiary, The Bancorp Bank, National Association. The Outlook for all long-term ratings is Positive.
Key Credit Considerations
The Positive Outlook remains underpinned by solid and recurring fee income scale (noninterest income consistently tracking at ~1.50% of average assets), which is derived through TBBK’s market leading and defensible position within the payments industry, and the expectations that earnings will continue to outperform while credit and liquidity measures remain stable. Bottom line earnings performance in 1H23 (ROA of 2.64%) has been robust, tracking well above most peers. Reflective of a diverse earnings profile, which considers the aforementioned fee contributions and differentiated lending niches, along with shift in the earning asset mix towards higher yielding loans (although RWA density remains slightly lower than rated peers), risk weighted ROA has tracked well above 2.00% over time. With a meaningful proportion of floating rate loans scheduled to reprice higher in the coming quarters, countering deposit costs that have tracked higher than many peers in recent periods (stemming from the rapid Fed rate hikes), margins are likely to remain relatively strong near term. The funding profile is underpinned by a vast number of lower-balance consumer deposits originated from accounts generated by its fintech payments partners. In that regard, uninsured deposits have historically represented only ~10% of total deposits with cash balances alone providing nearly 1.5x coverage. While TBBK possesses a unique funding advantage with an ability to generate deposits essentially on demand, deposit costs have accelerated faster than most given that costs are contractually adjusted immediately upon changes in Fed rates. However, in more normalized interest rate environments, deposit costs have tracked lower than many KBRA peers in pre-pandemic periods. Asset quality remains manageable, and although the NPA ratio tracks slightly above peers, mostly originating from a legacy commercial lending portfolio that has been in runoff since 2014, credit losses have been well contained. That said, the credit environment has been benign over an extended period of time, and we consider TBBK’s operating history and credit cycle experience as comparatively shorter than many KBRA rated peers. Capital protection is strong with the CET1 ratio (15.0% at 2Q23, or 14.4% including MTM losses on AFS securities) and the TCE ratio (9.9%) soundly above most peers and well-supported by solid earning capacity. While TBBK does not have an active dividend policy, payout ratios from stock repurchases have been comparatively high, in the 50% range, since YE21.
Sustaining above peer earnings performance, particularly on a risk weighted basis, and consistently holding the CET1 ratio soundly above the average of rated peers could lead to an upgrade in the near to medium term. Solid asset quality and maintenance of funding and liquidity measures must also be demonstrated. Conversely, the unanticipated loss of large payments relationships, leading to funding pressures and earnings volatility, substantial asset quality deterioration, unexpected degradation in the funding profile, or material operating challenges stemming from an adverse change in the regulatory environment could lead to negative rating momentum.
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