KBRA Assigns Ratings to Webster Financial Corporation

KBRA assigns a senior unsecured debt rating of A-, a subordinated debt rating of BBB+, a preferred stock rating of BBB, and a short-term debt rating of K2 to Connecticut-based Webster Financial Corporation (NYSE: WBS) (“Webster” or “the company”). In addition, KBRA assigns deposit and senior unsecured debt ratings of A, a subordinated debt rating of A-, and short-term deposit and debt ratings of K1 to Webster Bank, N.A., its principal subsidiary. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

Webster’s ratings are supported by a well-executed regional banking business model that benefits from and is differentiated most by its HSA Bank division ($10.8 billion of footings at 3Q21, including $7.3 billion of deposits), which is highly competitive and operates at scale. An experienced and very capable management team, together with an effective risk management framework (and implementation of it), remain instrumental to mitigating any potential risks from the company’s commercial loan portfolio, which includes somewhat higher sponsor-driven exposure (including leveraged lending), but, notably, has been a Webster core competency for 20 years. The pending combination with New York-based Sterling Bancorp (NYSE: STL; “Sterling”), anticipated to close in early February 2022, will effectively double Webster’s size, adding additional strong senior management and commercial bankers, along with attractive commercial client segments and a contiguous footprint. We consider the transaction to be a strategically favorable one, consistent with Webster’s business model objectives, that offers meaningful potential for enhanced risk-adjusted earnings power, while posing limited integration and execution risk.

Operating in a competitive but strongly growing market landscape for consumer-directed health care solutions, Webster’s HSA Bank division importantly contributes material, lower-cost core deposits, as well as fee revenue diversification to the company’s operating profile. With respect to the former, more normalized interest rate environments such as 2H19 magnify the benefits of Webster’s HSA Bank, as during this period the division’s approximately $6.3 billion of deposits reflected an average cost of 20 bps; contributing meaningfully to a very low average cost of total deposits for Webster of less than 60 bps for 2H19. For the most recent quarter, Webster’s average cost of total deposits (6 bps) was among the lowest in the industry.

Notwithstanding noted leveraged credit exposure, we consider Webster’s current loan portfolio and earning asset risk profile to be fairly consistent with peers; acknowledging that the combination with Sterling, at least optically, offers potentially increased credit risk. With that said, both companies have managed their respective higher risk segments well in challenging credit environments (including 2020), most importantly, with very manageable credit costs over time.

Webster’s pre-pandemic core performance (ROA~1.3%) has unsurprisingly been dampened somewhat since then, as 2021 results have been impacted by NIM compression driven by the rate environment. With a low-cost core deposit base and very favorable overall funding profile coming into 2020, the understandable decline in Webster’s earning asset yields has exceeded the opportunity to reduce the company’s already low funding costs as much. Stronger returns are expected to re-emerge with higher rates, as well as noted benefits expected to result from the Sterling combination. Anticipated enhanced earnings power – expected to be durable over-time – together with greater business diversity, offer positive credit profile offsets to lower prospective, publicly communicated capital targets that include a mid-10% CET1 ratio; down from +11% in recent years.

Rating Sensitivities

While a near-term change in Webster’s ratings is not currently anticipated, successful execution of the Sterling merger, complete with risk-adjusted performance momentum, and continued positive operating dynamics reflected by the HSA Bank division, would be considered favorably. A demonstrable increase in risk tolerance, unexpected asset quality deterioration, together with more aggressive financial management than anticipated, could have negative ratings ramifications.

To access ratings and relevant documents, click here.

The ratings are based on KBRA’s Bank & Bank Holding Company Global Rating Methodology published on October 16, 2019 and KBRA’s ESG Global Rating Methodology published on June 16, 2021.

Disclosures

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority pursuant to the Temporary Registration Regime. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

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