One of the nation's major debt ratings agencies cut its evaluations of the long- and short-term debt of First Niagara Financial Group and its subsidiaries, and reduced the company's outlook to "negative," because the bank's capital levels aren't high enough to handle any trouble.
Fitch Ratings downgraded its "issuer default ratings" for both the Buffalo-based parent company and its bank units by one notch to "BBB-" for long-term debt and to "F3" for short-term debt.
That means the company's long-term debt rating - equal to "good credit quality" - is at the bottom of "investment grade" status. And Fitch believes that First Niagara has only an "adequate capacity" to meet its short-term obligations.
"First Niagara continues to be a strong, profitable, growing organization, and Fitch's action has no impact on our ability to continue to actively serve businesses and households across our multistate footprint," said First Niagara spokesman David Lanzillo.
The cuts could make it harder and more expensive for the company to raise capital by issuing new debt, since investors will demand a higher yield to compensate for perceived higher risk. But neither Standard & Poor's nor Moody's Investors has changed its ratings, which remain a notch above those of Fitch.
Additionally, Fitch lowered its ratings outlook on the company to "negative," from "stable," saying First Niagara's capital position "is considered lean" after its purchase of HSBC Bank USA's upstate New York branch network and a restructuring of the company's balance sheet. It's also much lower than that of similarly rated peers and most of the U.S. banks that Fitch rates, based on two measures of capital.
As a result, Fitch said in its statment, the bank has "limited flexibility" if it needs capital to address problems that could arise from the "significant" loan growth and "heightened integration risks" from a series of major acquisitions in four states in the last few years.
And Fitch said that it may take the company longer to rebuild its capital levels than the ratings agency initially believed, since projected earnings may be hurt by the difficult economic climate and record low interest rates, even though the bank's core operating revenues "continue to be satisfactory."
The bank's risk profile has also worsened because First Niagara is holding more commercial loans and riskier investment securities, such as collateralized loan obligations, Fitch said, citing increased lending activity in highly leveraged transactions, asset-based lending, credit cards, indirect auto lending and syndicated loans. Even so, credit quality remains strong, with low levels of loan losses and bad debts and an expectation that those will remain "manageable" even if they increase somewhat.
Fitch also noted that the bank's investment securities make up one-third of its assets, even after the bank restructured that portfolio to reduce its interest rate risk.
Still, the bank has enough capital to support its current debt obligations and dividend, with $446 million in cash to handle $47 million in interest and operating expenses, and $111 million in dividend payments.
First Niagara's ratings already had been on "Rating Watch Negative," indicating the possibility of a downgrade. Fitch warned that another downgrade "would be possible" if First Niagara makes another acquisition "in the near term."