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Texas Capital's Outlook Unchanged Despite Merger Termination

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Mutual termination of Texas Capital Bancshares, Inc. (TCBI - Free Report) and Independent Bank Group, Inc. (IBTX - Free Report) merger agreement announced in December 2019 is seen to be a credit positive by Moody's Investors Service — the rating services arm of Moody's Corporation (MCO - Free Report) . However, the deal cancellation failed to encourage Moody’s to upgrade ratings.

The banks announced the decision earlier this week due to the impacts of coronavirus pandemic.

Per the ratings agency, the merger could have resulted in “material integration risks”, having considered the size of both companies. At the time of the announcement, Moody’s had thus downgraded the rating outlook to negative.

The outlook remained negative due to Moody's assessment of Texas Capital's asset risk, especially exposure to commercial real estate, including construction and development lending, energy sector and mortgage warehouse lending.

The coronavirus outbreak had significant impacts on the global economic outlook as it resulted in a decline in oil prices, and lower asset price, leading to a severe and extensive credit shock across many sectors, regions and markets. Moody's expects Texas Capital's energy portfolio to be stressed under the current low oil prices.

Further, Texas Capital has a weak capital position in comparison with other US banks. The company’s common equity Tier 1 ratio was 9.3% as of Mar 31, 2020, up 8.9% from the previous quarter end. However, Texas Capital’s decision to not pay common dividends is seen as a tailwind by Moody’s as it provides the management greater flexibility in managing capital position in the current uncertain operating environment.

Also, the bank’s conservative underwriting standards and effective risk management are expected to help in countering the exposure to risky loan portfolios. Moreover, funding profile benefits from a low reliance on confidence-sensitive market funding, owing to its sizeable deposit base.

What Could Trigger Change in Ratings?

Per Moody’s, Texas Capital’s outlook is less likely to be upgraded in the coming 12-18 months. However, the outlook can return to stable, if the company is able to sustain its current capitalization over the outlook period despite expected pressures on profitability and credit costs due to the pandemic.

However, Texas Capital's ratings could be downgraded if Moody’s feels weakening in internal controls or underwriting in the loan portfolio or if there is a material decline in capitalization. Also, indications of an increase in risk appetite could lead to a rating downgrade.

Shares of the company have lost 48.6% so far this year compared with the industry’s decline of 18.2%.



Currently, Texas Capital carries a Zacks Rank #5 (Strong Sell).

A better-ranked stock is GAIN Capital Holdings, Inc. . Its current-year earnings estimates moved north in 60 days’ time. Further, the company’s shares have appreciated 50.6% over the past six months. At present, it sports a Zacks Rank of 1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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