Texas Capital's Ratings Affirmed By Moody's, Outlook Stable

Texas Capital Bancshares’ (NASDAQ:TCBI) ratings have been recently affirmed by Moody's Investors Service, the rating arm of Moody's Corporation (NYSE:MCO) . Moody's affirmed the company’s standalone baseline credit assessment (BCA) at baa2, while its long-term issuer rating is Baa3. The company’s ratings outlook remains stable.

Long- and short-term deposits of Texas Capital Bank, National Association — a subsidiary of Texas Capital Bancshares — are rated A3/Prime-2.

Factors Driving the Ratings

Texas Capital Bancshares’ healthy financial performance and strong asset quality are the key reasons behind the ratings affirmation. Also, Moody’s believes this upbeat trend to remain stable in the upcoming days despite higher credit losses and loan loss provisions.

The ratings also consider the company’s comparatively weak capitalization, deposit funding profile and good operating efficiency.

Low capitalization is a key credit challenge for Texas Capital Bancshares. Since the company is more focused on loan growth, it has low capital deployment activities which help it manage its capital position better. Moody’s anticipates Texas Capital Bancshares’ capitalization to improve in 2019 as it intends to grow the company’s loans at a higher rate than its peers. However, the rate of loan growth might be lower than the previous years.

Although Texas capital Bancshares’ strong asset quality reflects good underwriting standards and effective risk management, Moody’s considers its rapid loan growth and significant exposure toward commercial real estate to be risky. Hence, Moody’s considers the company’s decision to significantly lower its leveraged loan portfolio to be favorable. Also, its net charge-off ratio is lower than other rated U.S. banks.

Texas Capital Bancshares’ considerable deposit base results in its low reliance on confidence-sensitive market funding. Though the funding profile might weaken if the company loses a few important deposit relationships, it remains focused on improving deposit quality. Moody’s expect this improvement to take time and is not guaranteed.

Texas Capital Bancshares’ low cost structure supports its profitability. Since a significant portion of the company’s loan portfolio is exposed to floating rates related to short-term LIBOR, its profitability was further supported by higher interest rates.

Factors That Might Trigger Change in Ratings

An upward ratings change may occur if the company is able to significantly improve capitalization and increase its deposit granularity while maintaining underwriting standards and a good asset quality.

Meanwhile, downward rating pressure could emerge if Moody’s assess relaxation in the company’s internal control or underwriting in its loan portfolio. Ratings may also be downgraded if capitalization improvement does not materialize as projected by Moody’s.

Shares of the company have gained 5% over the past three months compared to industry’s rise of 5.2%.

Currently, the stock carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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