First Niagara Financial Group Inc.
) fell 1.3% following the long-term rating downgrade of the
company and its affiliates by Moody's Investors Service - the
credit rating arm of
) - last Thursday. The company's issuer rating was downgraded
from Baa2 to Ba1 primarily due to anticipated deterioration in
The financial rating of First Niagara Financial's main operating
bank, First Niagara Bank, was downgraded from C- to D+. While the
bank's long-term deposit was revised downward from Baa1 to Baa3,
its short-term deposit rating slid from Prime-2 to Prime-3.
Moreover, the baseline credit assessment came in at baa3.
However, the overall rating outlook was maintained at stable.
This implies a lower possibility of the ratings witnessing any
changes in the near term.
The overall economy in the U.S. is reviving, with most of the
financial organizations reporting an improvement in credit
quality in the last quarter. However, organic growth in the
banking industry remained somewhat subdued, given soft demand for
loans and sluggish growth in deposits.
The scenario at First Niagara Financial was somewhat different.
Although the company reported steady growth in loans with nearly
9% year-over-year increase in 2013, its credit quality continued
The decline in credit quality can be traced back to May 2012 when
First Niagara Financial had acquired the New York branches of
HSBC Holdings plc
). Following the completion of the deal, total deposits with the
company immediately increased to amount more than the total
Now, though First Niagara Financial had capital in hand, it had
limited avenues to invest which in turn marred profitability.
Therefore the company initiated several measures to aggressively
improve its organic loan growth.
As per the rating agency, First Niagara Financial priced its
loans at a comparatively lower level than its peers and the terms
and conditions related to lending were relaxed to a great extent.
Therefore, the quality of the loans was compromised, which
increase chances of future defaults.
Additionally, First Niagara Financial's capital position is not
strong enough to withstand the probable credit losses associated
with the decline in credit quality. While the company's
risk-weighted tangible common equity ratio of 8.95% is below the
baa3 BCA peer median of 11.82%, the Tier 1 leverage ratio of
7.26% lags the benchmark of 10.48%.
The rating downgrade has dampened market sentiment, as evident
from the company's stock price movement. Nevertheless, we remain
optimistic about the company's performance, given its strong
fourth-quarter results. Apart from improvement in the top line,
First Niagara Financial reported lower expenses as well.
First Niagara Financial currently holds a Zacks Rank #4 (Sell). A
better-ranked financial organization is
West Bancorp. Inc.
). It has a Zacks Rank #1 (Strong Buy).
FIRST NIAGARA (FNFG): Free Stock Analysis
HSBC HOLDINGS (HSBC): Free Stock Analysis
MOODYS CORP (MCO): Free Stock Analysis Report
WEST BANCORP (WTBA): Free Stock Analysis
To read this article on Zacks.com click here.