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

14 Sep 2023   |   New York


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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A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

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