KBRA Affirms Ratings for Webster Financial Corporation
2 Feb 2024 | New York
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. (“Webster Bank”), 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 diverse core funding profile, which includes the highly competitive HSA Bank division. An experienced and capable management team, together with a disciplined approach to credit underwriting and effective risk management, remain instrumental to mitigating any potential challenges that could emerge from large C&I and investor CRE books in a less constructive economic environment. 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 (“Sterling”) combination in February 2022.
While the company’s HSA Bank division – with $8.3 billion of deposits at 4Q23 (at a 0.15% average cost) – has been a highly advantageous business segment for some time, intensified industry funding challenges emerging in March 2023 have magnified the importance to Webster. Helped substantially by the division’s low cost of deposits and consistent growth, Webster’s year-over-year increase in total deposit cost, while directionally consistent with that of the industry, has been muted (+155 bps since 4Q22), and coming off a lower base, increased to only 2.15% for 4Q23.
Benefiting from this comparatively favorable core funding profile, as well as an expected continuation of low relative credit costs, Webster’s returns should remain more durable than most; a core ROA of ~1.3% for FY23 supportive of this thesis. Notwithstanding noted leveraged loan and CRE exposure, we consider Webster’s overall loan portfolio credit risk profile to be similar to most peers. The addition of Sterling’s loan book has actually served to diversify overall portfolio concentrations, noting that both legacy companies managed their respective, perceived higher risk segments well in prior challenging credit environments, with very manageable historic credit costs.
Having built core capital during 2023 (CET1 to 11.1% at year-end), Webster’s recently completed acquisition of Ametros Financial Corporation, the largest professional administrator of medical insurance claim settlements, is expected to reduce the company’s 1Q24 capital ratios, based upon the $350 million all-cash transaction price, with a modest rebuild to current levels anticipated during 1H24.
Continued development of low-cost deposit verticals and related fee income would be considered favorably. An increase in risk tolerance, unexpected asset quality deterioration, or more aggressive financial management could have negative rating ramifications.
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