Fitch Ratings has lowered the long-term and short-term Issuer Default Ratings (IDRs) of TCF Financial Corporation ( TCB - Analyst Report ) and its subsidiaries to 'BBB-/F3'. Fitch downgraded TCF Financial after it concluded the peer review of 16 mid-tier regional banks.

Rating Rationale

As per Fitch, TCF Financial’s deteriorating credit quality, comparatively risky balance sheet and high level of exposure to consumer real estate loans relative to capital that has waned through strategic balance sheet restructurings are the main causes for the downward revision. In addition, lack of adequate liquidity remains a concern.

Asset quality at TCF financial has been constantly deteriorating due to high level of consumer-related problem loans. TCF Financial has the worst nonperforming asset ratio (NPA ratio) among the mid-tier regional group. At the end of 2012, NPA ratio stood at 7.50%, surging 24 basis points year over year. Elevated net charge-offs add to the already-stressed credit quality.

Further, increasing credit costs will negatively impact profitability. Higher levels of pre provision net revenue (PPNR) owing to the company's business strategy and balance sheet structure has resulted in a loan-to-deposit ratio of nearly 110%, comparatively high for TCF Financial’s rating. However, Fitch expects overall earnings performance to be marred by the requirement of higher provisions to maintain reasonable reserve levels.

Fitch also noted that capital levels considerably have reduced due to restructuring of balance sheet. The current capital levels may prove disastrous if the credit trends deteriorate.

Fitch has reaffirmed its rating outlook on TCF Financial at ‘Negative’. The rating agency is of the idea that further negative revision will be fuelled by failure to stabilize credit risk, which in turn will lead to deteriorated earning performance and low capital levels. Also, if TCF Financial’s new strategies fail to augment its financial condition, it will lead to downgraded outlook.

Rating action on Other Banks

In addition to TCF Financial, Fitch lowered IDRs of Fulton Financial Corporation ( FULT - Snapshot Report ) . On the other hand, the IDRs of Cathay General Bancorp ( CATY - Snapshot Report ) and First National of Nebraska were upgraded. Fitch has affirmed the IDRs of the remaining 12 banks, which included Webster Financial Corp. ( WBS - Snapshot Report ) . IDRs for mid-tier regional banks are dispersed with a low of ‘BB-' and a high of 'A+.'

Our Viewpoint

In our point of view, the reasons for downgrade are well justified. However, from TCF Financial’s perspective, the downgrade will lead to higher cost of funds.

Currently, TCF Financial carries a Zacks Rank #3 (Hold).