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Texas Capital's Ratings Affirmed, Outlook Lowered by Moody's

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Ratings of Texas Capital Bancshares, Inc. (TCBI - Free Report) and its banking subsidiary, Texas Capital Bank, National Association have been affirmed by Moody’s Investors Service, the rating division of Moody’s Corporation MCO. However, the ratings outlook moved down to negative from stable.

Notably, the bank's standalone baseline credit assessment (BCA) was baa2 and its long-term issuer rating was Baa3. Further, the subsidiary’s long- and short-term deposits were rated A3 and Prime-2, respectively.

Shares of this Zacks Rank #3 (Hold) company have rallied 24.3% so far this year, outperforming industry’s growth of 15.8%.

Reasons for Affirmation

The ratings affirmation follows the announcement of an all-stock ‘merger of equals’ deal between Texas Capital and Independent Bank Group, Inc. IBTX. The unchanged ratings reflect that the credit profile of the merged entity will be on par with that of Texas Capital.

Following the merger, the loan portfolio and deposit franchise will be more diversified, reducing the bank’s mortgage warehouse exposure, and will also provide opportunity to cut costs. However, the deal will increase its commercial real estate’s loan exposure. Further, there will be a significant integration risk, which was the key reason behind the outlook change.

Historically good financial performance and operating efficiency along with strong asset quality during the 2007-09 recession and 2015-17 energy downturn is incorporated in Texas Capital’s BCA. Lack of diversification of deposits and the fact that the bank has been rated lowest among the U.S. banks with respect to its capitalization have been taken into consideration while affirming the ratings. Further, Texas Capital expects the common equity Tier 1 ratio of the combined entity to be 8.6%, which is similar to the bank’s ratio before merger, and lower than that of Independent Bank.

Further, per Moody's, Texas Capital’s higher loan losses in 2018 and 2019 due to soft credit environment are indicative of rapid loan growth and leveraged lending risks. Moreover, the bank is reducing its exposure in the leveraged loan portfolio in 2019, which will benefit its asset risk.

The bank’s funding profile benefits from less dependence on confidence-sensitive market funding due to its sizeable deposit base. Yet, Texas Capital's focus on commercial banking and its limited number of branches lead to “less balanced franchise” and decreased granular deposit book value than its peers. Thus, the bank’s deposits cannot completely fund its loans and it has large deposits concentrations. Moody’s expects these problems to ease with the bank's more granular deposit base being sourced from increased branch network.

Key Pick

Luther Burbank Corporation LBC has witnessed upward earnings estimate revision of 8.5% for 2019 in the past 60 days. Moreover, the Zacks Rank #1 (Strong Buy) stock has gained 23.1% in the year-to-date period. You can see the complete list of today’s Zacks #1 Rank stocks here.

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