KBRA Affirms Ratings for Webster Financial Corporation

KBRA affirms the senior unsecured debt rating of A-, the subordinated debt rating of BBB+, the preferred stock rating of BBB, and the short-term debt rating of K2 for Connecticut-based, Webster Financial Corporation (NYSE: WBS) (“Webster” or “the company”). KBRA also 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 Webster Bank, N.A., its principal subsidiary. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

Webster’s ratings are supported by a well-executed regional banking business model that benefits from and is differentiated most by its scale and highly competitive HSA Bank division; a key deposit vertical which was supplemented during 1Q24 through the company’s acquisition of Ametros Financial Corp (“Ametros”), a leading custodian and administrator of medical funds from insurance claim settlements. Webster reflects an experienced and capable management team, which has maintained a disciplined long-term approach to credit underwriting and effective risk management; both instrumental in continuing to mitigate the ‘peer consistent’, negative risk rating migration that has emerged in pockets of the company’s C&I and investor CRE books during recent periods. While Webster’s C&I portfolio includes a meaningful component of sponsor-driven, sometimes more leveraged exposures; notably, the segment has been a core competency of the company for ~20 years. Capabilities with respect to CRE credit risk management are considered similarly strong, increasingly important given industry asset class performance trends and larger relative aggregate exposure since the Sterling Bancorp combination, notwithstanding the meaningful reduction in Office CRE exposure since mid-2022.

While the HSA Bank – with $9.0 billion of deposits at 4Q24 (at 0.16% average cost) – has been a highly advantageous business segment for some time, intensified industry funding challenges that emerged in 2023 magnified the division’s importance. Helped substantially by the division’s very low cost of deposits, with ~$10 billion of NIB balances, as well as Ametros’ $1 billion deposits – together representing >30% of Webster’s 4Q24 base – the increase in the company’s total deposit cost was muted compared to most during the Fed tightening cycle; declining 16 bps sequentially in 4Q24 (to 2. 20%) after peaking the prior quarter. Benefiting from this comparatively favorable core funding profile, as well as very manageable, normalizing credit costs, Webster’s returns have been more durable than most; including a core ROA of >1.1% for 2024.

Having built core capital during 2023 (CET1 to 11.1% at YE23), Webster’s $350 million cash purchase of Ametros in 1Q24 moved this measure back to the company’s long-term CET1 target (~10.5%). However, relative core capital has been rebuilt during 2024, with CET1 returning to 11.5% as of YE24.

Rating Sensitivities

Continued development of low-cost deposit verticals / related fee income would be viewed favorably. Webster’s conservative financial management bias also remains important to the rating Outlook. An increase in risk tolerance, unexpected asset quality deterioration, or more aggressive financial management could have negative rating ramifications.

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Methodologies