Fitch Affirms BankGuam Holding Co's Ratings at 'BBB'/'F2', Outlook Remains Negative
NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed BankGuam Holding Company's (BGHC) ratings at 'BBB'/'F2' with a Negative Outlook. The Negative Outlook reflects loan growth outside its core market and economic weakness in its home market of Guam. A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS - IDR and VRs
The affirmation of BGHC's Issuer Default Rating (IDR) and Viability Rating (VR) reflects its solid franchise and deposit base in Guam, continued asset quality improvement, and modestly enhanced earnings since 2012. These strengths are balanced against the high loan growth outside its home market, low profitability relative to peers due to its high cost structure, and somewhat weak capitalisation relative to its rated peer group. Capital levels were down year over year due to rapid deposit growth and market value depreciation its investment portfolio as interest rates rose in 2013.
Solid asset quality through the cycle is BGHC's primary ratings strength. BGHC's credit costs compare favourably relative to its similarly rated peers over the past six years. In addition, asset quality metrics continue to improve as non-performing assets continue to decline. Fitch views credit costs as likely to be manageable in the near term.
However, the Negative Outlook reflects the uncertainty related to Guam's economy, the potential risk to BGHC'S credit profile due to high loan growth in California, U.S. and the concentration risk in its loan portfolio. Any signs of weakening underwriting or meaningful increases in loan concentrations could result in a ratings downgrade. In addition, Fitch remains concerned about the concentration risk in its loan portfolio as loans to the top 20 borrowers comprise 38% of total loans and 350% of equity at the end of September 2013.
Economic conditions in Guam have experienced a moderate rebound since 2012 due to the recovery in Japan's outbound tourism, an increase in construction, and a substantial infusion of bond-financed payments for income tax refunds in 2011 and 2012. However, the unemployment rate has risen again and was 13.3% in March 2013, which means that Guam's economy is still depressed. Fitch believes economic stability in the near term depends on further increases in tourist arrivals as well as continued construction activities.
Bank of Guam is a $1.4 billion bank which serves markets in Guam, the CNMI, the other Islands of Micronesia, and San Francisco in the U.S. Bank of Guam holds a solid position in its home market, with deposit market share of 28%.
RATING SENSITIVITIES - IDRS AND VRs
Notwithstanding the stability of BGHC's core franchise, BGHC's ratings are highly sensitive to the growth, underwriting standards and performance of its California loan book, as these have relatively less seasoning. Should growth in this portfolio accelerate beyond current levels or experience sustained worsening in asset quality, BGHC's ratings would likely be downgraded. BGHC's ratings are also sensitive to continued economic weakness in Guam. Given BGHC's concentrated loan portfolio, continued capital accretion in line with its rated peers is needed to maintain its current rating.
Conversely, the Outlook could be returned to Stable if the California credit expansion slows and the bank is able to demonstrate longer term stable performance in this loan book. Fitch would also expect profitability and capitalization metrics to improve in order for the bank to achieve a Stable Outlook.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
BGHC and Bank of Guam have Support Ratings of '5' and Support Rating Floors of 'NF'. Fitch believes that they are not systemically important and, therefore, the probability of sovereign support is unlikely. The IDRs and VRs do not incorporate any support.
SUBSIDIARY AND AFFILIATED COMPANY KEY RATING DRIVERS
Bank of Guam is BGHC's principal subsidiary and is considered core to the parent, which supports equalized ratings between the bank subsidiary and the holding company. IDRs and VRs are equalized with those of the bank, reflecting its role as the bank holding company.
Fitch has affirmed the following ratings:
BankGuam Holding Company (BGHC)
--Long-term IDR 'BBB'; Outlook Negative;
--Short-term IDR 'F2';
--Viability rating 'bbb';
--Support rating '5';
--Support rating floor 'NF'.
Bank of Guam (BOG)
--Long-term IDR affirmed at 'BBB'; Outlook Negative;
--Short-term IDR affirmed at 'F2';
--Viability rating affirmed at 'bbb'
--Support rating affirmed at '5';
--Support rating floor affirmed at 'NF';
--Long-term deposits affirmed at 'BBB+';
--Short-term deposits affirmed at 'F2'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
2014 Outlook: U.S. Banks (Nov 21, 2013)
U.S. Banks: Liquidity and Deposit Funding (Aug 08, 2013)
U.S. Banks: Interest Rate Risks (What Happens When Rates Rise) (Jun 18, 2013)
U.S. Bank Mergers and Acquisitions -- When Will The Catalysts Kick In? (Jul 11, 2013)
Global Trading and Universal Banks - Periodic Review (Dec 12, 2013)
Fitch Fundamentals Index - U.S.; Index Trend Analysis 4Q13 (Jan15, 2013)
Risk Radar Global - Q313 (Sep 05, 2013)
Fitch Global Corporate Rating Activity -- Third Quarter 2013 (Dec 5, 2013)
U.S. Banking Quarterly Comment: 4Q13 (Earnings Continue to Tick Up, but Challenges Remain) (Jan 27, 2014)
Global Financial Institutions Rating Criteria (Jan 31,2014)
Assessing and Rating Bank Subordinated and Hybrid Securities (Jan 31, 2014)
Applicable Criteria and Related Research:
Assessing and Rating Bank Subordinated and Hybrid Securities Criteria
Global Financial Institutions Rating Criteria
Fitch Global Corporate Rating Activity -- Third-Quarter 2013
Risk Radar Global - Q313
Fitch Fundamentals Index
Global Trading and Universal Banks - Periodic Review
U.S. Bank Mergers and Acquisitions -- When Will The Catalysts Kick In?
U.S. Banks: Interest Rate Risks (What Happens When Rates Rise)
U.S. Banking Quarterly Comment: 4Q13 (Earnings Continue to Tick Up, but Challenges Remain)
U.S. Banks: Liquidity and Deposit Funding
2014 Outlook: U.S. Banks