KBRA Affirms Ratings for BankUnited, Inc. and Revises Outlook to Negative

KBRA affirms the senior unsecured debt rating of A-, the subordinated debt rating of BBB+, and the short-term debt rating of K2 for Miami Lakes, Florida based BankUnited, Inc. (NYSE: BKU) (“the company”). In addition, KBRA 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 the bank subsidiary, BankUnited, National Association (“the bank”). The Outlook for all long-term ratings has been revised to Negative from Stable.

Key Credit Considerations

The change in Outlook to Negative, in part, reflects the negative impact on profitability trends (1H23 ROA of 0.59%) from the current high interest rate environment primarily due to BKU’s relatively weaker core funding model (59% core deposits / total funding) and earnings reliance on spread based revenue (90% total revenue). BKU’s funding base has become significantly more dependent on FHLB borrowings (20% of total funding) and brokered deposits (17% of total funding) and KBRA believes the company’s ability to backfill the liability side of the balance sheet with core deposits over the intermediate term will be a challenge due to the relatively high loan-to-deposit ratio (above 95%). Conversely, supportive of the credit is the low risk-weighted balance sheet density (5-year average at 69%) relative to peer levels partially due to solid on balance sheet liquidity including cash and investment securities of 26% of total assets as of 2Q23. Also, the preponderance of the investment securities are recorded as available-for-sale with only a 6% unrealized loss associated with the MTM of the portfolio. BKU’s credit performance has historically reflected its conservative underwriting with a 5 year average NCO ratio of 20 bps. NPAs run at higher levels than peers due to the C&I, SBA, and 1-4 family segments which includes a portion of government guarantees. Also balancing their portfolio is a materially lower concentration in investor CRE and C&D segments that are expected to underperform in an economic downturn. Capital levels are consistent with the rating category although KBRA notes that management has historically returned a significant portion of earnings to shareholders in dividends and share buybacks. KBRA expects BKU to maintain capital at levels consistent with peer levels within the rating category.

Rating Sensitivities

A rating upgrade is unlikely over the intermediate term. A core funding profile more consistent with historical levels and rating category peers, as well as an improvement in risk adjusted earnings performance to a level similar to the rating category would be necessary for a reversion to a Stable outlook. Further deterioration in earnings trends and the inability to improve the core funding profile over the intermediate term or credit quality indicators that exceed peers driving weakened capital could result in negative rating action.

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