Recently, the long-term Issuer Default Ratings (IDRs) of
First Horizon National Corp.
) and its lead bank, First Tennessee Bank, were lowered to 'BBB-'
from 'BBB' by Fitch Ratings.
In the midst of a difficult economic environment, concerns
related to First Horizon's prospects have led to this rating
downgrade. However, a "Stable" rating outlook has been assigned
following the removal of the ratings from Rating Watch Negative.
According to Fitch, First Horizon has adopted steps to modify its
strategy and has progressed over the last few years. However,
getting back to solid profitability levels has been prolonged,
partially on account of tepid economic recovery. Further,
subsequent to reporting weak profitability levels compared to its
peer group in the last few years, the company is anticipated to
report a net loss for the full year 2012.
Notably, the charges incurred in the second quarter of 2012
associated with the expected government sponsored enterprises
mortgage repurchase expenses severely impacted First Horizon's
The rating agency opined that persistently low interest rate
environment, elevated credit costs mainly stemming from its
non-strategic loan portfolio pose a risk for First Horizon's
earnings in the quarters ahead.
While the company enjoyed decent capital ratios compared to its
peers previously, they have now come in line with similarly rated
banks. This follows its persistent weak earnings, a fall in pace
of balance sheet shrinkage as well as recent share repurchases.
However, Fitch expects asset quality to improve, though at a
modest pace. This is based on management's efforts to trim down
non-strategic portfolio partly offset by the presence of
residential real estate-related troubled debt restructurings that
comprised more than half of the company's nonperforming assets.
Moreover, according to the rating agency, First Horizon's
liquidity profile continued to improve and the company is likely
to get regulator's nod for upstream dividends from its lead bank
in the quarters ahead. Given the expectations, the rating agency
has confidence in First Horizon's liquidity profile and
anticipates it to well meet its expenditures as upcoming debt
We believe that the ratings are valuable for First Horizon, as
they play a major role in preserving investor confidence in the
stock and help boost its creditworthiness in the market. So a
downgrade is likely to send a short-term negative sentiment.
Further, we believe that shrinking revenue base and regulatory
issues, tepid economic recovery along with a low interest rate
environment serve as headwinds for the company's results.
Yet, First Horizon's endeavor to lower its exposure to problem
loans is impressive. It is also aiming at controlling costs and
improving long-term profitability by focusing on growing its core
Tennessee banking franchise, which would augur well going
forward. Moreover, share buybacks boost investors' confidence in
First Horizon currently retains its Zacks #3 Rank, which
translates into a short-term Hold rating. Considering its
fundamentals, we have a long-term Neutral recommendation on the
stock. One of its closest peers,
Cardinal Financial Corp.
) has a Zacks #1 Rank, implying a short-term Strong Buy
CARDINAL FINL (CFNL): Free Stock Analysis
FIRST HRZN NATL (FHN): Free Stock Analysis
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