KBRA Affirms Ratings for Northwest Bancshares, Inc.

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Columbus, Ohio-based Northwest Bancshares, Inc. (NASDAQ: NWBI) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and short-term deposit and debt ratings of K2 for the subsidiary bank, Northwest Bank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by NWBI’s durable, low-cost, and granular deposit franchise that has benefitted the company in the higher rate environment with a comparatively lower deposit beta of 30% through the cycle. As such, NWBI’s total cost of deposits continues to track near the lowest of all KBRA rated financial institutions at 1.74% for 2Q24 supported by the company’s solid deposit market share within its operating footprint, typically ranking in the top 10. However, NWBI’s loan portfolio is highly concentrated in fixed-rate conventional residential mortgage loans, limiting its ability to reprice the loan book as interest rates rapidly increased and creating a drag on NIM, and subsequently, earnings, as funding costs have increased. That said, management utilized the proceeds from the recent securities repositioning (sold ~15% of investment securities portfolio with proceeds of $276 million at a pre-tax loss of $39 million) to reinvest into higher yielding securities and pay down more expensive borrowings, which, combined with management’s focus on growing the more profitable commercial lending segment, should benefit NIM going forward.

NWBI’s noninterest income lines remain a solid contributor to earnings representing ~20% of total revenue (or ~0.8% of average assets) supported by durable fee income from the company’s investment management and trust services. While we note that NPAs have historically tracked above peer averages, loss content remains well contained dating back to the GFC when the company largely outperformed peers with a peak NCO ratio of 0.7% in 2011. Additionally, NWBI has historically managed capital rather conservatively, with capital ratios generally tracking above peers, including a CET1 ratio that has run over 100 bps above rated peer averages at 13.2% as of 2Q24, providing ample loss absorbing capacity should potential credit issues arise (KBRA recognizes that this is, in part, related to the company's greater concentration of lower-risk weighted residential mortgage loans - 41% of total loans at 2Q24). Further supporting ratings is the company’s considerably lower concentration in both C&D and investor CRE (23% and 127%, respectively at 2Q24). Given the weaknesses arising within CRE, namely office CRE, we consider NWBI to be favorably positioned to manage through a potential credit down cycle.

Rating Sensitivities

A rating upgrade is not expected over the medium term, though continued growth and geographic expansion with an improved earnings profile, including a more diversified revenue mix and sound credit quality metrics, may have positive rating implications over time. Conversely, aggressive capital management resulting in capital levels deteriorating beyond peers and/or worsening macro-conditions, including a significant rise in unemployment levels that results in outsized credit losses impacting the profitability of the company could result in negative rating action.

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