On Thursday, Standard & Poor's (S&P) Ratings Services
downgraded the long-term issuer credit ratings of
TCF Financial Corporation
) and its subsidiary - TCF National Bank to 'BBB-' and 'BBB',
respectively. Moreover, short-term rating on TCF Financial was
been lowered to 'A-3' from 'A-2' and ratings on preferred stock
reduced to 'BB' from 'BB+'. Further, TCF National Bank's
subordinated debt rating was lowered to 'BBB-' from 'BBB'.
Reasons Behind the Downgrade
S&P stated that the downgrade in the ratings was driven
mainly by TCF Financial's increasing level of non-performing
assets (NPAs). NPAs remained high at 7.5% of loans including
other real estate owned (OREO) in the third quarter ended
September 30, 2012, up from 6.9% in the prior quarter.
Even after excluding the effect of new accounting guidance for
banks, NPAs elevated for TCF Financial in the third quarter,
compared with the prior-year period. Additionally, S&P
estimates increased credit risk for the company, attributable to
the jump in NPAs associated with borrowers under Chapter 7
Moreover, amidst such a challenging environment, the resignation
of the company's chief risk officer added to the woes. S&P
believes deteriorating credit quality coupled with operational
risk due to management change weakens TCF Financial's risk
position. Therefore, based on its criteria, S&P has also
lowered the company's risk position to 'moderate' from
Further, S&P commented that expansion in national lending
platforms and changes in deposit account strategies of the
company leads to increased operational risk. Launched in 2008,
TCF Financial's inventory finance business more than doubled in
volume since year-end 2011. Additionally, in 2011, the company
bought an indirect auto lender. Though such transactions
inculcate diversification for the company, yet they bring in new
The ratings services firm also believes that debit interchange
and overdraft fees regulatory reform have hugely impacted TCF
Financial's non-interest income, destabilizing the profitability.
Therefore, taking into consideration all concerns relating to the
company's stability, S&P has taken the step of downgrading
However, S&P has maintained the stable outlook on TCF
Financial. The affirmation of the outlook depicts S&P's
belief in gradual reduction in NPAs level over the next year,
improvement in profitability level and continual growth in
inventory and auto finance businesses of TCF financial.
Rating Actions by other Agencies
Following the asset quality deterioration in the third quarter,
in October 2012, Fitch Ratings also downgraded the long-term
Issuer Default Ratings (IDRs) for TCF Financial and TCF National
Bank to 'BBB' from 'BBB+'. Moreover, a negative outlook was
Based on the weak credit profile of TCF Financial, in May 2012,
Moody's Investors Service, a rating arm of
) also reduced the ratings of TCF National Bank to A3 from A2 for
long-term deposits, to Baa1 from A3 for subordinated debt, and to
C from C+ for standalone bank financial strength. Moreover, the
bank's short-term rating was lowered from Prime-1 to Prime-2.
Yet, the negative outlook on TCF's rated subsidiaries was
retained. TCF Financial is unrated by Moody's.
The rating revisions are valuable for the banks as they play a
major role in preserving investor confidence in the stock and
help boost its creditworthiness in the market.
MOODYS CORP (MCO): Free Stock Analysis Report
TCF FINL CORP (TCB): Free Stock Analysis
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Though TCF Financial is working to address such issues, further
rating downgrades could be implemented following pressure on the
credit quality and profitability.
Overall, we expect the company to maintain its superior position
in the market based on its positive approach to market conditions
and improving net interest income. Moreover, a healthy capital
position indicates the company's robust standing.
Besides, a tepid economic recovery, regulatory issues along with
the expectation of continued low interest rate environment are
projected to limit the stock's upside potential in the upcoming
TCF Financial currently retains its Zacks #3 Rank, which
translates into a short-term Hold rating. We believe such
downgrades in ratings might lead to negative estimate revisions.
This, in turn, could cause a downgrade in the Zacks Rank.