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Texas Capital's (TCBI) Ratings Affirmed, Outlook Upgraded

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Texas Capital Bancshares, Inc.’s (TCBI - Free Report) and its bank subsidiary, Texas Capital Bank, National Association’s ratings have been affirmed by Moody’s Investors Service, a rating arm of Moody’s Corporation (MCO - Free Report) . The outlook for both Texas Capital Bancshares and Texas Capital Bank N.A. has been changed to stable from negative.

Texas Capital Bancshares’s long-term issuer rating is Baa3 and its bank subsidiary, Texas Capital Bank N.A.’s long term and short-term deposits have been affirmed at A3/ Prime-2. Additionally, its standalone baseline credit assessment (“BCA”) is baa2.

Reason for Ratings Affirmation

Per Moody’s, Texas Capital Bancshares displays a healthy funding and liquidity profile on the back of improving capitalization and asset concentration, which supports its ratings.

The bank has progressed to diminish its exposure to the energy sector, which accounted for 29% of the company’s tangible common equity (TCE) base at year-end 2020, marking a plunge from 54% at year-end 2019. Additionally, it has succeeded in trimming its leveraged loan portfolio.

Notably, the ratings that Moody’s has assigned, take into consideration Texas Capital’s decline in commercial real estate loans, which now stand below two times the TCE threshold of Moody’s. However, the bank has a high concentration of construction lending, which was approximately the size of its TCE base at year-end of 2020.

The ratings affirmation also reflects Moody's outlook about Texas Capital's improved capitalization and liquidity position that would alleviate execution risks associated with the recent management changes. Though the bank’s growing capitalization remains below its similarly-rated peers, its Moody’s TCE ratio was 8.95% as of Sep 30, 2020, up from 8.88%, at year-end 2019.

Texas Capital’s bottom line is dependent on spread income, so it stays vulnerable on the low rate environment and its inability to curtail costs amid the need for ongoing business investments in the pandemic-induced economic disruptions. However, its funding profile gains from a low dependence on confidence-sensitive market funding due to the huge deposit base.

Additionally, Texas Capital is concentrated in single-client credit exposures and a lack of granularity in its loan portfolio that presents a potential for rapid decline in credit quality should many large credits become a concern at the same time. Nonetheless, Moody’s believes in Texas Capital’s past competence to handle such concentrations as indicated by its robust asset quality. Texas Capital's on balance sheet liquidity in 2020 advanced to 32% of tangible banking assets at year-end 2020, up from 14% at year-end 2019.

The alteration in Moody’s outlook to stable from negative reflects the rating agency’s view that Texas Capital will continue upgrading its asset quality and capitalization over the next year. Also, Moody’s assigned a stable outlook to the ratings because it is of the opinion that the company’s liquidity profile will remain stronger than it has been in the past.

What Could Lead to a Rating Upgrade?

Texas Capital's ratings could be upgraded if that bank materially improves its capitalization, demonstrates a lower asset risk appetite, and improves the granularity and size of its core deposit base.

When can Ratings be Downgraded?

Downward pressure on ratings could arise if there is a continued decline in Texas Capital’s capitalization or liquidity position that is inconsistent with Moody's current expectations. The bank should maintain Moody’s TCE ratio of 9% or more, to avoid a breach and focus on reducing asset concentrations or any strategic missteps.

Over the past year, shares of Texas Capital have gained 40.5% compared with 6.4% growth recorded by the industry it belongs to.


Currently, the company carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Rating Actions by Moody’s on Other Banks

Recently, Moody’s affirmed the ratings for many finance companies. A couple of these are SVB Financial Group (SIVB - Free Report) and Webster Financial Corporation (WBS - Free Report) . The outlook for both banks was affirmed at stable.

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