Published on 18 Jun 2024 on Zacks · via Yahoo Finance

Associated Banc-Corp (ASB) Ratings, Outlook Affirmed by Moody's

Associated Banc-Corp ASB and its banking subsidiary Associated Bank, N.A.’s outlook has been re-affirmed as stable by Moody's Investors Service, a division of Moody’s Corporation MCO. The rating agency has affirmed the company’s Baa3 standalone baseline credit assessment. The holding company’s issuer rating of Baa3 for long-term senior unsecured notes also remained unchanged.

Reasons for Affirming the Ratings

Per Moody’s, Associated Banc-Corp’s ratings affirmation reflects the balance between its credit headwinds due to its significantly concentrated portfolio in commercial real estate (CRE) loans and the offsetting qualitative and quantitative risk mitigating factors.The rating agency is of the opinion that concentrated CRE exposure might exert pressure on ASB’s asset quality and profitability in light of the current high interest rate environment reflecting unique challenges to CRE, specifically office loans. As of Mar 31, 2024, the asset class represents 241% of ASB’s tangible common equity (TCE).ASB’s TCE/risk-weighted assets (RWA) were 9.3% as of Mar 31, 2024, thus, capitalization indicates a relative rating weakness for the company as compared with its peers. This magnifies the impact of CRE and offers a thinner cushion against unexpected losses.Despite this, Associated Banc-Corp’s CRE loans constitute only 25% of its total loans, which is relatively lower than many other regional banks. Moreover, Moody’s noted that the company’s largest CRE exposures appear to be well-underwritten and managed, thus, mitigating the associated credit risk with the loans. Per the rating agency, Associated Banc-Corp’s capitalization levels, long-run profitability (with five-year average net income/tangible assets of 0.8% from 2019 to 2023) and appropriate credit risk are sufficient to mitigate its CRE concentration risks at the current rating level.With liquid banking assets comprising 15.6% of tangible banking assets, ASB’s balance sheet liquidity is considered a relative weakness, per the rating agency. Yet, the affirmation indicates that the company’s core deposit funding, with roughly 77% insured and collateralized deposits, is adequate at the existing rating level to offset funding pressures despite depositors continuing to switch to accounts offering higher interest rates.Additionally, Associated Banc-Corp’s profitability metrics remain moderate with a marginal improvement expected in 2024, driven by its recent balance sheet repositioning efforts, which included the sale of low-yield residential loans and investment securities. The resulted proceeds were used to redeem high-cost wholesale funding as well as investment in securities offering higher yields in order to offer support to offset the industry-wide funding cost pressures. Yet, Moody’s considers it unlikely that the bank’s net income to tangible assets will exceed 0.8% in 2024, which is a level that remains roughly in line with its recent five-year average.