Fitch Upgrades BBVA Compass Bancshares, Inc.'s LT IDR to 'BBB+'; Outlook Stable

CHICAGO--()--Fitch Ratings has upgraded the Issuer Default Rating (IDR) for BBVA Compass Bancshares, Inc. (CBSS) to 'BBB+' from 'BBB', and the Viability Rating (VR) at 'BBB'. The Rating Outlook is Stable. This action follows Fitch's recent rating action on CBSS' parent company, Banco Bilbao Vizcaya Argentaria SA (BBVA)(refer to press release titled 'Fitch Upgrades Santander and BBVA to 'A-'; Stable Outlook', dated May 29, 2014 for additional information on the BBVA rating action). See the full list of rating actions at the end of this rating action commentary.

KEY RATING DRIVERS - IDRS AND SENIOR DEBT

CBSS' IDR reflects the higher of its support-driven IDR or its standalone rating, the VR. CBSS' support-driven IDR is currently notched one level below those of its parent, since it is strategically important to, but not considered a core subsidiary of BBVA. Thus, with BBVA's upgrade to 'A-', CBSS' support-driven IDR was upgraded to 'BBB+'.

RATING SENSITIVITIES - IDRS AND SENIOR DEBT

Since CBSS' ratings and Outlook are correlated with those of BBVA, changes in BBVA's ratings may result in changes to CBSS' IDRs and Outlook. BBVA's Rating Outlook is Stable.

KEY RATING DRIVERS - VR

CBSS' VR, which reflects the company's intrinsic creditworthiness absent any extraordinary support, was affirmed at 'bbb' primarily reflecting the company's good capital position, and solid asset quality profile. The ratings are somewhat constrained by a relatively weaker earnings profile than other large regional banks.

The capital profile remains strong, with a high Tier 1 common ratio (under Basel I) and tangible common equity-to-tangible assets of 11.39% and 9.5%, respectively, at YE2013. These ratios compare well to other large regional banks. CBSS received no objection to its capital plan under the 2014 CCAR process, the first time CBSS participated in the formal CCAR stress testing. CBSS requested to upstream a modest semi-annual common dividend of approximately $51 million, subject to approval by the company's Board of Directors.

Asset quality ratios also continue to improve in line with industry trends, while nonperforming asset levels remain very manageable. Nonperforming balances are below peer averages, with net charge-offs (NCOs) also comparing favourably. Fitch attributes some of the better relative performance to the geographic make-up of the bank's loan portfolio. A relatively high percentage of loans are in Texas, which has fared much better than many other states during the financial crisis.

CBSS' recent earnings performance reflects a vast improvement over the losses reported during the prior years, which were weighed down by large goodwill impairment charges and elevated provision expenses. Despite the recent improvement, Fitch notes that CBSS' reported earnings still lag peer averages. When pushed-down goodwill is also excluded from ratios, adjusted return on assets (ROA) improves by approximately 4 basis points (bps) to 67bps, though this is below the peer average of approximately 110bps in first quarter 2014 (1Q'14).

Fitch also notes that CBSS' earnings include a meaningful benefit from reserve releases. In 2013, reserve releases, or the amount of NCOs that exceeded provision expenses, were 17% of pre-tax income. This amount is approximately 50% higher than the average for large regional banks.

Fitch expects reserve releases to diminish over time for the industry as reserve levels approach more historical coverage levels, and loan growth resumes more normalized levels. As CBSS begins to provision at more normalized levels, this could impact profitability measures.

CBSS' performance is also affected by purchase accounting accretion (PAA) related to the acquisition of Guaranty, namely in the net interest margin (NIM). The reported NIM includes approximately 30bps of PAA, which will ultimately dissipate over time, as will the indemnification asset.

RATING SENSITIVITIES -VR

CBSS' ratings are sensitive to those drivers that would impact the VR, namely changes in capital, earnings or asset quality. Fitch envisions more ratings upgrade potential over the medium- to long-term than downward pressure given the company's overall improving credit profile.

CBSS' VR could be upgraded with improving earnings performance, combined with the continuation of moderating asset quality and the maintenance of capital at appropriate levels. However, Fitch remains somewhat concerned regarding the strong loan growth CBSS has reported recently, especially as it compares to peer averages. In general, Fitch views loan growth that significantly outpaces GDP and peer growth somewhat skeptically as it raises concerns about adverse selection, underwriting standards, and the appropriate risk-return trade-offs.

KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING

CBSS is strategically important to, but not considered a core subsidiary of BBVA by Fitch. CBSS' IDR reflects the higher of its support-driven IDR or VR. CBSS' support-driven IDR has historically been one notch below BBVA, reflecting Fitch's view that CBSS is strategically important to BBVA, though not core. Since CBSS' support reflects institutional support, no support rating floor is assigned.

In the event Fitch views CBSS as no longer strategically important to BBVA, its support rating could be downgraded. If the support rating were downgraded, CBSS' VR would likely become the anchor rating for IDR.

KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid securities issued by CBSS and by various issuing vehicles are all notched down from CBSS' or its bank subsidiaries' VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles. Their ratings are all primarily sensitive to any changes in the VRs of CBSS.

KEY RATING DRIVERS AND SENSITIVITIES - HOLDING COMPANY

CBSS' IDR and VR are equalized with those of Compass Bank, 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. Should CBSS' holding company begin to exhibit signs of weakness, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of Compass Bank.

KEY RATING DRIVERS AND SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS

CBSS' uninsured deposit ratings are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. The ratings of long- and short-term deposits issued by CBSS and its subsidiaries are primarily sensitive to any change in CBSS' long- and short-term IDRs.

The following ratings are upgraded:

BBVA Compass Bancshares, Inc.

--Long-term IDR to 'BBB+' from 'BBB'; Outlook Stable.

Compass Bank

--Long-term IDR to 'BBB+' from 'BBB'; Outlook Stable;

--Long-term deposits to 'A-' from 'BBB+';

--Senior unsecured to 'BBB+' from 'BBB'.

The following ratings are affirmed:

BBVA Compass Bancshares, Inc.

--VR at 'bbb';

--Support at '2';

--Short-term IDR at 'F2'.

Compass Bank

--Short-term IDR at 'F2';

--VR at 'bbb';

--Short-term deposits at 'F2';

--Support at '2';

--Subordinated debt at 'BBB-'.

TexasBanc Capital Trust I

--Preferred stock at 'BB-'

Additional information is available on www.fitchratings.com

Applicable Criteria and Related Research:

'Global Financial Institutions Rating Criteria (Jan. 31, 2014');

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

'Assessing and Rating Bank Subordinated and Hybrid Securities Criteria (Jan. 31, 2014');

'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles (March 27, 2014');

'U.S. Banking Quarterly Comment: 1Q14 (April 28, 2014');

'Fitch Fundamentals Index 1Q14 (April 15, 2014').

Applicable Criteria and Related Research:

Fitch Fundamentals Index 1Q14

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746196

U.S. Banking Quarterly Comment: 1Q14

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=747185

U.S. Bank HoldCos & OpCos: Evolving Risk Profiles

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742096

Assessing and Rating Bank Subordinated and Hybrid Securities Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137

Rating FI Subsidiaries and Holding Companies

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

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832184

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Julie Solar, +1-312-368-5472
Senior Director
Fitch Ratings, Inc.
70 West Madison
Chicago, IL 60602
or
Secondary Analyst
Bain Rumohr, +1-312-368-3153
Associate Director
or
Committee Chairperson
Christopher Wolfe, +1-212-908-0771
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Julie Solar, +1-312-368-5472
Senior Director
Fitch Ratings, Inc.
70 West Madison
Chicago, IL 60602
or
Secondary Analyst
Bain Rumohr, +1-312-368-3153
Associate Director
or
Committee Chairperson
Christopher Wolfe, +1-212-908-0771
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com