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Fitch has upgraded its rating outlook on Associated Banc-Corp (ASBC - Analyst Report) along with its banking subsidiary Associated Bank, NA from ‘Stable’ to ‘Positive.’ Moreover, the rating agency has affirmed the Issuer Default Ratings (IDRs) – long-term and short-term – for the company.

Rationale Behind Upgrade

The rating revision came on the back of a strong capital base and constantly improving asset quality metrics of the company. Fitch stated that Associated’s strong liquidity along with a sound loan growth has driven it to upgrade the rating outlook. In addition, Associated is well positioned to meet the Basel III requirements given its strong Tier 1 Leverage and Total Risk-Based Capital ratios.

The company’s last quarter was exceptional in terms of asset quality improvement. The quarter witnessed nearly 20% reduction in non-performing assets (inclusive of troubled debt restructurings) compared with the prior-year quarter.

Moreover, net charge-offs (year to-date) fell to 0.58% against 1.32% in the same period last year. The improvement in asset quality was also contributed by reserve releases and absence of provisions.

Further, improvement in earnings was contributed by hikes in mortgage rates, which added nearly $47 million of incremental pre-tax mortgage banking income to the bottom line last year.

Additionally, Associated’s return on assets (ROA) has been improving. Consequently, Fitch expects stabilizing provision expense, hiked mortgage banking income, as well as various efficiency initiatives, such as branch consolidation, to contribute further in ROA improvement.

As of September 30, 2012, other credit rating agencies, namely Moody's Investors Service – the ratings arm of Moody's Corp. (MCO - Analyst Report) – and Standard & Poor's (S&P), have maintained their outlook on Associated at ‘Stable.’

Conclusion

This rating outlook revision depicts creditworthiness of the company and will instill investors’ confidence. Further, a decent top-line growth and sound capital deployment activities will help the stock sustain investor interest.

However, rising expenses keep us on the sidelines. Moreover, we are concerned about the impacts of the prevailing low interest rate environment, sluggish economic growth and stringent regulatory landscape on the company’s financials in the subsequent quarters.

Associated retains a Zacks #2 Rank, which translates into a short-term Buy rating.  We expect positive earnings estimate revisions in the days ahead based on the rating outlook revision by Fitch, aiding the stock achieve a better Zacks Rank.

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