Fitch downgrades PacWest, citing ‘deterioration’ in key capital ratio

Ratings agency Fitch Ratings downgraded the rating of PacWest Bancorp and its banking subsidiary, Pacific Western Bank, citing the company’s recent decline in capital reserves.

In a press release on Wednesday, Fitch announced the revision of PacWest’s long-term default rating from “BBB” to “BBB-” and blamed the downgrade on the “rapid, growth-driven deterioration” in the credit ratio. ordinary Tier 1 capital of the bank. The Los Angeles-based bank’s CET1 ratio fell to 8.2% in the second quarter from 10.4% a year ago.

According to Fitch, the decrease in capital is the result of several factors, including “a high rate of loan growth” which, together with recent acquisitions, has put pressure on capital levels. A growing concentration of residential mortgages and asset-based commercial lending and an increase in unfunded liabilities, primarily in multi-family construction financing, are also at play, Fitch said.

The agency also criticized the company’s “relatively narrow business model, relatively low contribution to fee income…and moderate risk appetite,” as well as “a consistent appetite for business and equity acquisitions.” assets”, although Fitch noted that such purchases have had “well-managed integrations to date”.

“This is a story of rapid growth that has put pressure on capitalization,” Fitch analyst Mark Narron said in an interview Thursday. “Acquisitions certainly played a role” in the downgrade, he added.

PacWest CEO Matt Wagner did not respond to a request for comment Thursday.

Matt Wagner, CEO of PacWest

The company’s loan book grew 15.7% in the first half to $26.3 billion, according to the company’s second-quarter earnings report. This is on top of the book’s growth of 21.4% last year.

PacWest is taking steps to improve its capital position. He raised $513 million by selling preferred stock, and it will “continue to grow [its] capital ratios from here with increasing profitability and slower balance sheet growth,” William Black, executive vice president of strategy and corporate development, told analysts last month at the quarterly call on the results of the bank.

But the recent capital raise, other capital raising strategies, and even PacWest’s expectations of lower loan growth in the second half of the year may not be enough “to reverse [the] CET1 trajectory by the end of the year,” Fitch warned in the statement. Consequently, the agency “does not anticipate a resumption of CET1 at [first-half 2021] short-term levels,” he said.

The CET1 ratio is a measure that compares a bank’s capital to its risk-weighted assets to determine how well the organization could withstand financial hardship. The Federal Reserve requires all banks to maintain a CET1 ratio of at least 4.5%.

Wednesday’s downgrade comes nearly four months after Fitch issued a “negative outlook” for PacWest’s long-term issuer default rating, based on the continued deterioration of the company’s CET1 ratio. During the first quarter of this year, the ratio fell to 8.64%, compared to 10.18% and 8.86% in the third and fourth quarters of 2021, respectively.

On Wednesday, Fitch praised PacWest’s track record of “good asset quality, low credit losses, consistent financial performance and a stable deposit base” and said PacWest’s short-term default rating would remain unchanged. , while the rating outlook is now “stable”.

PacWest is embarking on a CEO transition. In June, the company, which has $41 billion in assets, announced that Wagner, who was general manager for 22 yearswill retire at the end of 2023 and will be succeeded by Paul Taylorwho became president of PacWest on July 1.

Wagner was at the forefront of significant growth. He took over when the bank had less than $1 billion in assets. Over the past five years, the company has nearly doubled in size.

Sallie R. Loera