Fitch Downgrades TCF Financial Corp's Ratings to 'BBB-/F3' Following Mid-Tier Regional Peer Review

NEW YORK--()--Fitch Ratings has downgraded the long-term and short-term Issuer Default Ratings (IDRs) of TCF Financial Corporation and its subsidiaries to 'BBB-/F3'. The Outlook remains Negative. A full list of ratings follows at the end of this release.

Fitch reviewed TCF Financial Corporation as part of a peer review that included 16 mid-tier regional banks. The banks in the peer review include: Associated Banc-Corp., Bank of Hawaii Corporation, BOK Financial Corporation, Cathay General Bancorp, Cullen/Frost Bankers, Inc., East West Bancorp, Inc., First Horizon National Corporation, First National of Nebraska, Inc., First Niagara Financial Group, Inc., Fulton Financial Corporation, Hancock Holding Company, People's United Financial, Inc., Synovus Financial Corp., TCF Financial Corporation, UMB Financial Corp., Webster Financial Corporation. Refer to the release titled 'Fitch Takes Rating Actions on Its Mid-Tier Regional Bank Group Following Industry Peer Review' for a discussion of rating actions taken on the entire mid-tier regional bank group.

The mid-tier regional group is comprised of banks with total assets ranging from $10 billion to $36 billion. IDRs for this group is relatively dispersed with a low of 'BB-' and a high of 'A+'. Mid-tier regional banks typically lag their large regional bank counterparts by asset size, geographic footprint and product/revenue diversification. As such mid-tier regional banks are more susceptible to idiosyncratic risks such as geographic or single name concentrations.

Fitch's mid-tier regional bank group has fairly homogenous business strategies. The institutions are mostly reliant on spread income from loans and investments. With limited opportunity to improve fee-based income in the near term, Fitch expects that mid-tier banks will continue to face greater earnings headwinds in 2013 than larger institutions with greater revenue diversification.

Share repurchases is common theme amongst the mid-tier banks. As mid-tier banks face earnings headwinds, institutions have begun repurchasing common shares to improve shareholder returns. Fitch anticipates continued repurchase activity in 2013 as the return on equity lags historical norms for the group.

In addition to share repurchases, Fitch has observed that some mid-tier banks have looked to their investment portfolio to improve returns. Most notably, CLOs and CMBS have become more popular amongst mid-tier banks. Although such securities are beneficial to yields and returns, Fitch notes that such purchases can be a negative ratings driver if the risks are not properly measured, monitored and controlled.

Asset quality continues to improve throughout the banking sector. Both nonperforming assets (NPAs) and net charge-offs (NCOs) are down significantly year over year. Fitch anticipates further asset quality improvement as nonperforming loan (NPL) inflow slows. Reserve levels have also declined as asset quality improves, which has been beneficial to earnings in 2012. Fitch expects further reserve releases in 2013 but at a slower pace.

RATING ACTION AND RATIONALE

The long-term and short-term ratings of TCB have been downgraded to 'BBB-/F3'. The Outlook remains Negative. The downgrade of TCB's long-term and short-term ratings primarily reflects the company's sustained weak asset quality and consumer-oriented, higher-risk balance sheet compared to other mid-tier regional banks. More specifically, Fitch remains concerned about the company's level of exposure to consumer real estate relative to capital that has been thinned out through strategic balance sheet restructurings as well as the relatively lower level of readily available liquidity on balance sheet. Further, the downgrade better aligns the TCB's ratings with peers of similar condition and performance. Fitch has maintained the Rating Outlook at Negative reflecting its view that further negative rating action could take place if credit risk is not stabilized over the near-to-mid-term causing negative earnings performance and capital deterioration or if the bank's relatively new strategies do not favorably impact TCB's operating results and financial condition.

RATING DRIVERS AND SENSITIVITIES - IDRs and VRs

TCB's weak asset quality continues to be a primary negative ratings driver. TCB reported a NPA ratio (inclusive of accruing TDRs) of nearly 7.50% at year-end 2012 up from 7.26% a year ago, and the worst NPA ratio within the mid-tier regional group. Continued asset quality deterioration has primarily been driven by a high level of consumer-related problem loans. In fact, at third quarter 2012 (3Q'12), over 40% of total NPAs were consumer-related accruing TDRs. Therefore, Fitch expects NPAs to remain at an elevated level in both relative and absolute terms over the intermediate term due to the lifetime TDR status of residential TDRs.

Fitch also expects NCOs, with an annualized quarterly average in excess of 125 basis points (bps) over the last 20 quarters even when excluding the impact of new regulatory guidance issued in 3Q'12, to continue to exceed others in the mid-tier group going forward. These trends in asset quality remains at odds with peer institutions that are largely experiencing significant improvements in the levels of NPAs, NCOs and provisioning while TCB's trends remain negative overall.

As noted above, Fitch expects TCB's profitability to be weighed down by credit costs going forward but be commensurate with its rating category of 'BBB-'. TCB generates a relatively high PPNR/AA due to high spread income and a low cost of funds. Fitch expects an elevated level of PPNR given the company's business strategy and balance sheet structure that has resulted in a loan to deposit ratio of nearly 110%, a ratio relatively high for TCB's rating level. However, Fitch also expects overall earnings performance to continue to be adversely impacted by the need to take higher provisions to maintain reasonable reserve levels leading to operating results in line with other 'BBB-' rated institutions.

Fitch notes that capital levels thinned out during TCB's balance sheet restructuring at beginning of 2012 and have remained relatively weak for its rating level. The company had a Fitch Core Capital to Risk Weighted Assets of 9.31% at 3Q'12 higher than just two banks in the peer group. This level of capital is likely adequate for the company in the near term but could be strained if credit trends worsen or growth in the bank's national lending portfolio becomes excessive relative to Fitch's expectations.

In the long term, if legacy credits show improving trends TCB's ratings or Outlook could be positively impacted. Conversely, TCF's ratings are sensitive to asset quality trends, which, if remain volatile and negative, could result in adverse rating action. Further, if the company's relatively new national lending strategies such as near-prime auto lending fail to positively impact the company's operating results and overall financial condition, Fitch could take negative rating action.

RATING DRIVERS AND SENSITIVITIES - Support Ratings and Support Floor Ratings:

All of the mid-tier regional banks in the peer group have Support Ratings of '5' and Support Floor Ratings of 'NF'. In Fitch's view, the mid-tier banks are not considered systemically important and therefore, Fitch believes the probability of support is unlikely. IDRs and VRs do not incorporate any government support for any of the banks in the mid-tier regional bank peer group.

RATING DRIVERS AND SENSITIVITIES - Subordinated Debt and Other Hybrid Securities:

Subordinated debt and hybrid capital instruments issued by the banks are notched down from the issuers' VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. The ratings of subordinated debt and hybrid securities are sensitive to any change in the banks' VRs or to changes in the banks' propensity to make coupon payments that are permitted but not compulsory under the instruments' documentation.

RATING DRIVERS AND SENSITIVITIES - Holding Company:

All of the entities reviewed in the mid-tier regional bank group have a bank holding company structure with the bank as the main subsidiary. All subsidiaries are considered core to parent holding company supporting equalized ratings between bank subsidiaries and bank holding companies. IDRs and VRs are equalized with those of its operating companies and banks reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries.

RATING DRIVERS AND SENSITIVITIES - Subsidiary and Affiliated Company Rating:

All of the entities reviewed in the mid-tier regional bank group factor in a high probability of support from parent institutions to its subsidiaries. This reflects the fact that performing parent banks have very rarely allowed subsidiaries to default. It also considers the high level of integration, brand, management, financial and reputational incentives to avoid subsidiary defaults.

Fitch has taken the following rating actions:

TCF Financial Corporation

--Long-term IDR to 'BBB-' from 'BBB'; Negative Outlook maintained;

--Viability to 'bbb-' from 'bbb';

--Short-term IDR to 'F3' from 'F2';

--Preferred stock to 'B' from 'B+'.

--Support affirmed at '5';

--Support floor affirmed at 'NF'.

TCF National Bank

--Long-term IDR to 'BBB-' from 'BBB'; Negative Outlook maintained;

--Viability to 'bbb-' from 'bbb';

--Short-term IDR to 'F3' from 'F2';

--Short-term deposits to 'F3' from 'F2';

--Subordinated debt to 'BB+' from 'BBB-';

--Long-term deposits to 'BBB' from 'BBB+'.

--Support affirmed at '5'

--Support floor affirmed at 'NF'.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the source(s) of information identified in Fitch's Master Criteria, these actions were additionally informed by information provided by the companies.

Applicable Criteria and Related Research:

--'Risk Radar' (Jan. 16, 2013);

--'U.S. Banks: Rationalizing the Branch Network (Witness the Incredible Shrinking Branch Network)' (Sept. 17, 2012);

--'U.S. Banks: Mortgage Representations and Warranties (Banks Increase Reserves; Uncertainty Remains)' (Aug. 20, 2012)

--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);

--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);

--'Treatment of Unrealized Losses in U.S. Bank Capital Rule Proposal (Pro-Cyclical Capital Policy to Create Greater Capital Volatility for Banks)' (Aug. 7, 2012);

--'Basel III: Return and Deleveraging Pressures' (May 17, 2012);

--'Assessing and Rating Bank Subordinated and Hybrid Securities' (Dec. 05, 2012).

Applicable Criteria and Related Research:

Risk Radar Update

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=699014

U.S. Banks: Rationalizing the Branch Network (Witness the Incredible Shrinking Branch Network)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688330

U.S. Banks: Mortgage Representations and Warranties (Banks Increase Reserves; Uncertainty Remains)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684038

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Treatment of Unrealized Losses in U.S. Bank Capital Rule Proposal (Pro-Cyclical Capital Policy to Create Greater Capital Volatility for Banks)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685638

Basel III: Return and Deleveraging Pressures

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=678273

Assessing and Rating Bank Subordinated and Hybrid Securities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695542

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Contacts

Fitch Ratings
Primary Analyst
Bain K. Rumohr, CFA, +1-312-368-3153
Associate Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Justin Fuller, CFA, +1-312-268-2057
Director
or
Committee Chairperson
Joo-Yung Lee, +1-212-908-0560
Managing Director
or
Media Relations
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Bain K. Rumohr, CFA, +1-312-368-3153
Associate Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Justin Fuller, CFA, +1-312-268-2057
Director
or
Committee Chairperson
Joo-Yung Lee, +1-212-908-0560
Managing Director
or
Media Relations
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com