DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Wintrust Financial Corporation (Wintrust or the Company), including the Company’s Long-Term Issuer Rating of A (low). At the same time, DBRS Morningstar confirmed the ratings of its banking subsidiaries, including Wintrust Bank, N.A. (collectively the Banks). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Banks is ‘A’, while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Banks’ IA.
KEY RATING CONSIDERATIONS
The ratings confirmation and Stable trend reflect Wintrust’s well-defended market share in the Chicago and Milwaukee metro areas, the success of its community banking business model, and the added diversity of its scaled and growing national premium insurance finance businesses. The ratings also capture Wintrust’s conservative credit culture, which has demonstrated resilience through credit cycles with strong pre-provision earnings, reaching record levels in the most recent quarter. The ratings also consider the Company’s relatively limited geographic diversification and the increasing competitive pressures in its community banking business regions, as well as a large, albeit well managed, exposure to commercial real estate. Finally, the ratings consider Wintrust’s leading deposit market share and its unique 15 charter banking business model, which has been an asset in the recent period of stress on the regional banks following the failures of three U.S. regional banks. Wintrust’s first quarter 2023 deposit stability and good loan growth, stable asset quality and strategic interest rate risk management through cash flow and portfolio hedges, demonstrate the Company’s strengths as stable community banking leader, embedded in the communities it serves, with experience and management ability to adapt to change.
Over the longer term, sustained above peer profitability and further revenue diversification, while maintaining sound balance sheet fundamentals, would lead to a ratings upgrade. Conversely, a sustained deterioration in asset quality, or significant margin pressure from higher funding costs resulting in below-peer profitability, or a material decline in capital levels, would lead to a ratings downgrade.
Franchise Combined Building Block (BB) Assessment: Good/Moderate
With $53 billion in assets, Wintrust is the second largest bank headquartered in Chicago. The Company has emerged as the leading local alternative to the large banks in the highly competitive Chicagoland market, despite its relatively brief operating history. Wintrust’s growth has been supported by its community bank operating model, considerable number of small bank acquisitions (typically Chicago-based community banks with less than $1 billion in assets) and organic branch strategy. Wintrust has also opportunistically acquired and built a national insurance premium finance business, enhancing product and geographic diversification.
Earnings Combined Building Block (BB) Assessment: Strong/Good
Wintrust’s earnings are well diversified, especially for a Company of its size, with around 25% of revenues derived from noninterest income. The Company’s relatively broad product range has supported resilient earnings performance through credit cycles, including the recent recession related to the pandemic and during the 1Q23 volatility around bank failures. For 1Q23, Wintrust reported a return on equity 15.7%. Results included an expanding NIM on higher earning asset yields and strong loan growth of 12% from the prior year quarter. Positively, Wintrust worked to build hedges around now higher interest rates to lock in higher yields on the portfolio and to hedge cash flows in anticipation of the likely shift in interest rate policy to stable or lower rates. Wintrust has lowered asset sensitivity in the recent quarter, with interest rate sensitivity to a +100 basis point shift in interest rates causing a +2.4% rise interest income at the end of the 1Q23, down from +11% expected interest rate sensitivity in the 1Q22. Meanwhile, Wintrust now expects a -100 basis point shift in rates to reduce net interest income by -2.4%, down from -11% in 1Q22. Wintrust still has about 73% of loans maturing or repricing in one year or less and will likely actively manage interest rate risk as loans reprice.
Risk Combined Building Block (BB) Assessment: Strong/Good
Wintrust has a top-tier national premium finance business, which we view as a distinguishing characteristic relative to peers. Overall, the premium finance portfolio represents more than 35% of total loans, is well collateralized and has an exceptionally low loss history. The rest of the loan portfolio is predominately commercial, about evenly split between C&I and CRE, and heavily exposed to the Chicago and Milwaukee metro areas. Nonetheless, DBRS Morningstar’s concentration risk concerns are largely mitigated, considering Wintrust’s favorable credit performance during the pandemic, the financial crisis and current stellar asset quality metrics.
Funding and Liquidity Combined Building Block (BB) Assessment: Good
Wintrust’s funding and liquidity profile remains solid. DBRS Morningstar considers the Company’s deposit base to be defensible, with demonstrated stability in market share in the past two years despite recent stresses and meaningful increases in competition for deposits in its service areas. While Wintrust’s CD level is relatively high, the overall deposit mix has improved, benefiting from acquisitions and organic growth. Consistent with industry trends, deposits are migrating quickly to higher interest-bearing accounts, with non-interest-bearing deposits down 4% to 26% of total deposits in 1Q23. While the deposit mix has been migrating to higher yielding products, overall deposit balances have experienced only a very modest decline sequentially.
Capitalization Combined Building Block (BB) Assessment: Good/Moderate
Wintrust has historically returned modest amounts of capital to shareholders, preserving it for acquisitions and organic growth. We view Wintrust’s capital position as solid, given its historically well-managed credit risk. Wintrust has increased its capital levels in the past year with Common Equity Tier 1 now at 9.2%, placing it much closer to peers in terms of core capital levels, while management has stated they will continue to retain capital this year due to expected increases in regulatory requirements.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/415188
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17, 2022)
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations: https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations
(June 23, 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings: https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17, 2022)
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
The primary sources of information used for this rating include Morningstar Inc. and Company Documents, DBRS Morningstar considers the information available to it for the purpose of providing this rating was of satisfactory quality.
The rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
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