Fitch Affirms Bank of the West's Long-term IDR at 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed Bank of the West's (BOW) Long-Term Issuer Default Rating (IDR) at 'A'. The Rating Outlook for the Long-Term IDR is Stable. Fitch has also affirmed BOW's Viability Rating (VR) at 'a-'. BOW is a wholly-owned subsidiary of BNP Paribas. A full list of rating actions follows at the end of this release.

This action follows Fitch's recent rating action on BOW's ultimate parent company, BNP Paribas (BNPP). For additional information, see 'Fitch Affirms BNP Paribas at 'A+'; Outlook Stable' (Dec. 13, 2016) at www.fitchratings.com.

KEY RATING DRIVERS

IDRS, NATIONAL RATINGS AND SENIOR DEBT

BOW's IDRs are linked to that of their 100% owner, BNPP. BOW's IDR reflects the higher of its support-driven IDR or its standalone rating, the VR. BOW's support-driven IDR is 'A', while its stand-alone rating or VR is 'a-'. BOW's institutional support-driven IDR is higher than its VR, reflecting its important role in the group. Fitch believes that BNPP has the ability and propensity to provide support to BOW.

VR

Fitch affirmed BOW's VR at 'a-' primarily due to the strength of its capital profile and good asset quality. Further, Fitch views favorably BOW's franchise, with the sixth highest deposit market share in the economically diverse state of California. About 54% of BOW's total deposits are from Contra Costa County and the San Francisco, Oakland and Hayward MSA where BOW has the highest and fifth market positions. The rating affirmation also incorporates BOW's relatively weaker earnings profile and high loan growth over the past few years, particularly in C&I and non-owner occupied CRE and multifamily.

At June 30, 2016, BOW's Common Equity Tier 1 ratio was 12.7%, well above the peer median for large regional banks of 10.7%. BOW's strong capital position provides rating support and an appropriate level of protection for unexpected losses. Further, Fitch expects capital will be managed conservatively at BOW given its parent company's participation in the annual regulatory stress testing.

BOW's asset quality continues to improve with lower levels of nonaccrual balances and still benign credit costs. Following the crisis, NCOs peaked at 1.96% in 2009, which compared well to the large regional peer average of around 2.4% for the same period. Fitch attributes some of the better than peer performance to the lack of external shareholder pressure which lends support to a more conservative risk appetite. For example, BOW's commercial real estate (CRE) exposure is small, even during the last financial crisis when many U.S. regional bank peers suffered significant loan losses because of sizable CRE concentration, specifically construction and land development loans. BOW's CRE exposure was 1.4 times Tier 1 capital at the end of 2008, significantly lower than the concentrations of many U.S. regional bank peers. At 2Q16, BOW's CRE represents 1.1 times its Tier 1 capital.

Offsetting these rating strengths, the bank's earnings profile generally lags the large regional bank peers and is highly dependent on spread income. BOW reported an ROAA of approximately 81bps in 1H16, compared to the large regional peer median of roughly 95bps. Moreover, approximately 20% of BOW's total revenue is fee income, compared to an average of about 40% for large regional banks.

This reliance spread income, paired with the current low rate environment, has placed pressure on BOW as low-yielding assets mature and are replaced with even lower-yielding assets. Earnings have also been impacted by investments in strategic initiatives, including private banking expansion, and in small business and corporate segments, along with investments in IT, compliance, and risk. Fitch expects profitability to remain relatively flat given the current rate environment with the potential to trend down as loan portfolio seasoning may necessitate increases loan loss provision expenses.

BOW's loan growth has outpaced that of its peers, particularly within C&I, non-owner occupied CRE and multifamily loans. The portfolios grew 13%, 15%, and 40%, respectively at 2Q16 from the level a year ago. Fitch views this growth cautiously given the competitive environment. Nonetheless, BOW's multifamily loan portfolio, with the highest growth rate, has remained small, $1.4 billion or less than 3% of the total loan book at 2Q16.

BOW's loan portfolio also includes consumer installment loans (approximately 18% of loans at June 30, 2016), most of which are RV/Marine loans that performed relatively well during the financial crisis. BOW is a leading lender in RV/marine lending in the U.S.

SUPPORT RATING AND SUPPORT RATING FLOOR

BOW's Support Rating of '1' reflects the high probability of support from its parent, BNPP. BOW's support-driven IDR has historically been one notch below BNPP, reflecting Fitch's view that BOW is strategically important to BNPP, though not core.

Since these support ratings based on institutional support, as opposed to sovereign support, there is no Support Rating Floor assigned.

LONG- AND SHORT-TERM DEPOSIT RATINGS

BOW's long-term deposit ratings are one notch higher than the company's IDR, which reflect depositor preference for the U.S. banks, and the superior recovery prospects for deposits resulting from depositor preference. BOW's short-term deposit rating at 'F1' is linked to the Long-Term IDR per Fitch's rating criteria, and as such, are sensitive to changes in the company's IDR.

RATING SENSITIVITIES

IDRS, NATIONAL RATINGS AND SENIOR DEBT

BOW's IDR is directly linked to that of BNPP. Should BNPP's IDR change, the IDRs of BOW would also be affected. Additionally, if BNPP's ability or propensity to support BOW changes, its IDR could be reviewed for rating action.

VR

Fitch believes that the VRs have limited upside over the near to intermediate term, absent a material improvement in the company's earnings profile, which Fitch views as unlikely.

Conversely, negative pressure on the VR may occur in the event of capital deterioration as the strength of the bank's capital position supports the VR. Fitch expects BOW and its parent will manage capital conservatively over the near term given the formation of an IHC, the inclusion of BNPP's U.S.-based broker dealer, and the participation in annual CCAR stress testing. If capital were to decline materially, BOW's VR would likely be downgraded.

Any potential credit quality challenges stemming from sustained high loan growth rates above economic growth rates could also lead to negative rating pressure. More specifically, negative rating pressure could emerge if BOW is unable to maintain its prudent underwriting standards given current industry competitive dynamics. Sign of increased credit risk such weakening of FICO scores or LTV or sustained increases in early delinquencies could lead to negative rating pressure.

The VR is also sensitive to the performance of BOW's recreational vehicles and marine lending portfolio such as increased delinquencies or loss rates have the potential to put pressure on the company's VR.

SUPPORT RATING AND SUPPORT RATING FLOOR

BOW's Support Rating is sensitive to a number of factors, including but not limited to: the strategic importance of the financial institution to BNPP; degree of integration with a parent; guarantees and commitments provided by the parent; percentage ownership or control; jurisdiction; track record of support; cost of support; the nature of the owner; and the importance of the franchise to the owning institution.

LONG- AND SHORT-TERM DEPOSIT RATINGS

BOW's long-term deposit ratings are one notch higher than the company's IDR, which reflect depositor preference for the U.S. banks, and the superior recovery prospects for deposits resulting from depositor preference. BOW's short-term deposit rating at 'F1' is linked to the Long-Term IDR per Fitch's rating criteria, and as such, are sensitive to changes in the company's IDR.

Fitch has affirmed BOW's ratings as follows:

--Long-Term IDR at 'A'; Outlook Stable;

--Short-Term IDR at 'F1';

--Viability Rating at 'a-';

--Support Rating at '1';

--Long-Term Deposits at 'A+';

--Short-Term Deposits at 'F1'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Global Bank Rating Criteria (pub. 25 Nov 2016)

https://www.fitchratings.com/site/re/891051

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1016554

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016554

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
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Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Julie Solar, +1-312-368-5472
Senior Director
or
Committee Chairperson
Justin Fuller, +1-312-368-2057
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or
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hannah.james@fitchratings.com

Contacts

Fitch Ratings
Thuy Nguyen, +1-212-908-0383
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Julie Solar, +1-312-368-5472
Senior Director
or
Committee Chairperson
Justin Fuller, +1-312-368-2057
Senior Director
or
Media Relations
Hannah James, New York, +1-646-582-4947
hannah.james@fitchratings.com