Fitch Affirms Astoria Fin'l's IDRs at 'BBB-'/'F3' Following Peer Review; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the long- and short-term Issuer Default Ratings (IDRs) of Astoria Financial Corporation and its principal banking subsidiary, Astoria Bank, at 'BBB-'/'F3'. The Rating Outlook is Stable. A full list of ratings actions is provided at the end of this release.

Fitch reviewed AF as part of its Niche Bank Peer Review, which also includes Dime Community Bancshares, Inc., Emigrant Bancorp, Inc., and New York Community Bancorp, Inc. Niche banks are defined by their narrow business models, limited deposit franchises and geographic concentrations. Fitch views these limitations as ratings constraints across the peer group. The group is composed of banks with total assets ranging from $4 billion to $49 billion that lend primarily in the New York City metropolitan residential real estate market.

KEY RATINGS DRIVERS - IDRs, VRs, AND SENIOR DEBT

The ratings are supported by AF's good asset quality, solid underwriting, and strong capital position. Key rating constraints include AF's below-peer profitability and relatively weaker liquidity profile compared to similarly-rated bank peers.

Fitch believes AF has good asset quality and considers it a key credit strength. As a result of a strategic portfolio shift, one-third of the bank's loan book is now comprised of NYC multifamily real estate loans, the vast majority of which are secured by rent-controlled properties. Fitch views NYC multifamily real estate loans as relatively safe assets because favourable rent regulations generally keep building vacancies low and ultimately reduce the volatility of cash flows generated by such properties. Furthermore, AF significantly reduced its level of non-performing assets (NPAs) through a bulk sale of non-accruing residential mortgage loans in third quarter 2014 (3Q'14). The sale brought AF's total non-performing assets down almost $200 million, or from 3.78% of total loans, and real estate owned to 2.25%. Fitch observes that AF's level of NPAs relative to total loans and real estate owned is the lowest it has been in six years.

AF's ratings are also supported by solid underwriting performance. AF experienced low credit costs through the latest credit cycle with net charge-offs averaging about 31 basis points (bps) over the last 10 years, peaking at 62 bps in 2008. Fitch believes AF's underwriting standards are conservative and entail low loan-to-value ratios and good cash flow coverage.

Earnings are a rating weakness for the company, in Fitch's view. AF is heavily reliant on spread income and is affected negatively during periods of low interest rates. Given the level and cyclicality of earnings, a near-term improvement in earnings is unlikely to impact the company's credit rating.

Fitch views AF's liquidity profile as a constraint on its current credit rating. Although AF currently has sufficient liquidity, the company is relatively more reliant on non-core funding sources such as FHLB advances and repurchase agreements. In 2014, average wholesale funding balances totalled $4.1 billion or 26% of average assets. Because AF has relatively higher reliance on wholesale funding, the company has a relatively higher loan-to-deposit ratio and higher cost of funds.

RATING SENSITIVITIES - IDRs, VRs, AND SENIOR DEBT

AF's ratings are sensitive to a change to AF's liquidity profile and earnings performance. Should AF grow its core deposit base and improve core earnings, positive ratings momentum could build. Structural improvement in earnings, such as improved revenue diversification or lower funding costs, could be a credit positive over the medium- to long- term.

Conversely, although not anticipated, Fitch considers AF's ratings to be most sensitive to asset quality deterioration. Aggressive capital management could also negatively impact ratings, although that too is not expected in the near term.

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

Astoria Bank's 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. Fitch believes U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.

RATING SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS

The ratings of long- and short-term deposits issued by Astoria Bank are primarily sensitive to any change in the company's IDR. Should the long-term IDR be downgraded, deposit ratings would be similarly affected

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR

The Support Rating of '5' and Support Ratings Floor of 'NF' reflect Fitch's view that Astoria Financial Corporation and Astoria Bank are not considered systemically important and therefore, the probability of support is unlikely.

RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR

AF's Support Rating and Support Rating Floor are sensitive to Fitch's assumption as to capacity to procure extraordinary support in case of need.

KEY RATING DRIVERS - HOLDING COMPANY

AF's IDR and VR are equalized with those of its bank subsidiary, Astoria 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

RATING SENSITIVITIES - HOLDING COMPANY

Should AF begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, 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 Astoria Bank.

Fitch has affirmed the following ratings with a Stable Outlook:

Astoria Financial Corporation

--Long-term IDR at 'BBB-';

--Short-term IDR at 'F3';

--Senior Debt 'BBB-';

--Viability Rating at 'bbb-';

--Preferred Stock 'B';

--Support Rating at '5';

--Support Rating Floor at 'NF';

Astoria Bank (Formerly Astoria Federal Savings and Loan Association)

--Long-term IDR at 'BBB-';

--Short-term IDR at 'F3';

--Viability Rating at 'bbb-';

--Long-term Deposits at 'BBB';

--Short-term Deposits at 'F2';

--Support Rating at '5';

--Support Rating Floor at 'NF'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research

--Global Bank Rating Criteria (Mar. 20, 2015)

--'U.S. Banking Quarterly comment: 4Q14' (Jan. 28, 2015);

--'U.S. Basel III and Dodd Frank Act Regulatory Guide' (Nov. 21, 2014);

--'2015 Outlook: U.S. Banks (Growth in a Challenging Rate Environment)' (Nov. 12, 2014);

--'U.S. Banks: Implications of an Interest Rate Shock Scenario' (Oct. 30, 2014)

--U.S. Banks: Liquidity and Deposit Funding (Aug. 08, 2013);

--U.S. Banks: Interest Rate Risks (What Happens When Rates Rise) (June 18, 2013);

--U.S. Bank Mergers and Acquisitions -- When Will The Catalysts Kick In? (July 11, 2013);

--'Fitch Fundamentals Index (4Q14)(Jan. 15, 2015);

--'Risk Radar Global 1Q15' (Mar. 30, 2015).

Applicable Criteria and Related Research:

U.S. Banks: Implications of an Interest Rate Shock Scenario

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=800748

2015 Outlook: U.S. Banks (Growth in a Challenging Rate Environment)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=809228

U.S. Basel III and Dodd Frank Act Regulatory Guide (Applicability of New Bank Regulations in the U.S.)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=798848

U.S. Banking Quarterly Comment: 1Q14

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

U.S. Banks: Liquidity and Deposit Funding

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714196

Risk Radar Global 1Q15

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864073

Fitch Fundamentals Index

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=729196

U.S. Bank Mergers and Acquisitions -- When Will The Catalysts Kick In?

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=712539

U.S. Banks: Interest Rate Risks (What Happens When Rates Rise)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710875

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982537

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Jaymin Berg, CPA
Director
+1-212-908-0368
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Doriana Gamboa
Director
+1-212-908-0865
or
Committee Chairperson
Christopher Wolfe
Managing Director
+1-212-908-0771
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jaymin Berg, CPA
Director
+1-212-908-0368
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Doriana Gamboa
Director
+1-212-908-0865
or
Committee Chairperson
Christopher Wolfe
Managing Director
+1-212-908-0771
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com