KBRA Affirms Ratings for Hanmi Financial Corporation
8 Mar 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 Los Angeles, CA-based Hanmi Financial Corporation (NASDAQ: HAFC) (“Hanmi” 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 HAFC’s subsidiary, Hanmi Bank. The Outlook for all long-term ratings is Stable.
Key Credit Considerations
The ratings are supported by Hanmi’s strong market presence in the Korean-American banking space and the company’s long-running ties with Korean communities, in conjunction with its U.S. Subsidiaries of Korean Companies (“USKC”) business vertical, which has produced steady growth, especially in terms of deposit generation (USKC deposits increased by 42% in 2023 and currently represent 13% of total deposits; 41% of USKC deposits are noninterest-bearing). This operational, if not strategic, advantage has not only alleviated some of the NIM pressure but also has supported deposit stability in the current uncertain environment.
The ratings are also buoyed by Hanmi’s disciplined capital management. The consolidated CET1 ratio increased to 11.9% as of YE23, aided by limited RWA growth during the year, placing it above its rated peer group average by around 70 bps. Regulatory capital ratios are anticipated to increase in 2024, due principally to limited growth in RWA.
Beginning in 2023, bottom line earnings performance has been pressured by rapidly increasing deposits costs (including a mix shift to higher cost time deposits), compared to the change in yields on earning assets, resulting in a reduced NIM. The changes in deposit mix were primarily connected to declining noninterest-bearing balances (-25% YoY; currently constituting 30% of total deposits), which were largely replaced by an increase in time deposits. As a result, the cost of total deposits increased to 2.18% for 2023 from 0.44% for the prior year.
The ratings are counterbalanced by the relatively high CRE loan weighting. Investor CRE loans represent 328% of total RBC (or 50% of total loans) and include exposures to large single borrowers as well as meaningful, although reduced, exposures to the cyclical hospitality sector (12% of total loans) and the office sector (9% of total loans). However, KBRA favorably views the diversification efforts in recent years to emphasize C&I lending via the USKC vertical, scale residential mortgage lending operations, and reduce the investor CRE concentration.
On-balance sheet liquidity, including cash and equivalents and unencumbered investment securities, totaled $1.1 billion as of 4Q23. The bank maintains additional available borrowing capacity from FHLB, FRB, and unused Feds Line amounting to $1.2 billion. Total on- and off-balance sheet liquidity covers ~90% of uninsured deposits ($2.5 billion, or 40% of total deposits). KBRA views that the coverage of uninsured deposits could be mitigated by the bank’s less encumbered balance sheet, given that only 3% of the total investment securities and 38% of the total loans are pledged.
Rating Sensitivities
Positive rating momentum would most likely be driven by consistently stable earnings performance, encompassing a more diversified revenue mix, a lower proportion of loans in relation to total deposits and/or improved core deposit funding, as well as a commitment to maintain regulatory capital ratios in line with the KBRA rated peer group. Conversely, rating pressure would most likely develop from deterioration in loan quality, such that bottom line profitability becomes highly variable, including periods of net losses, or if consolidated regulatory capital ratios were to decrease to (and were likely to be maintained at) levels below rated peers.
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