Fitch downgrades PacWest, citing ‘deterioration’ of key capital ratio

The credit rating agency Fitch Ratings has downgraded PacWest Bancorp and its banking subsidiary, Pacific Western Bank, citing the company’s recent decline in capital reserves.

In a press release Wednesday, Fitch announced the revision of PacWest’s long-term issuer default rating from “BBB” to “BBB-” and blamed the downgrade on the “rapid, growth-driven deterioration” of the bank’s common equity Tier 1 ratio. The Los Angeles-based bank’s CET1 ratio fell to 8.2% during the second quarter, down from 10.4% during the year-ago period.

According to Fitch, the decrease in capital is a result of several factors, including “a high rate of loan growth” that, along with recent acquisitions, has put pressure on capital levels. A growing concentration in residential mortgage and asset-based commercial loans and an increase in unfunded commitments, primarily in multifamily construction finance, are also at play, Fitch said.

The agency also criticized the company’s “relatively narrow business model, relatively low fee-income contribution … and moderate risk appetite,” plus “a consistent appetite for company and asset acquisitions,” though Fitch noted that such acquisitions have had “well-managed integrations to date.”

“This is a rapid growth story that pressured capitalization,” Fitch analyst Mark Narron said Thursday in an interview. “Acquisitions definitely played a part” in the downgrade, he added.

PacWest CEO Matt Wagner did not respond Thursday to a request for comment.

Matt Wagner, PacWest CEO

The company’s loan book grew 15.7% during the first half of the year to $26.3 billion, according to the company’s second-quarter earnings report. That’s on top of growing the book 21.4% last year.

PacWest is taking some action to improve its capital position. It raised $513 million by selling preferred stock, and it will “continue to grow [its] capital ratios from here with increasing profitability and slower balance sheet growth,” William Black, executive vice president of strategy and corporate development, told analysts last month during the bank’s quarterly earnings call.

But the recent capital raise, other capital-enhancing strategies and even PacWest’s expectation of lower levels of loan growth during the back half of the year may not be enough “to reverse [the] CET1 trajectory by year-end,” Fitch warned in the release. Therefore, the agency “does not anticipate a recovery of CET1 to [first-half 2021] levels over the near term,” it said.

The CET1 ratio is a measurement that compares a bank’s capital against its risk-weighted assets to determine how well the organization could endure financial distress. The Federal Reserve requires all banks to maintain a CET1 ratio of at least 4.5%.

Wednesday’s downgrade comes nearly four months after Fitch issued a “negative outlook” for PacWest’s long-term issuer default rating, based on the ongoing deterioration of the company’s CET1 ratio. During the first quarter of this year, the ratio fell to 8.64%, down from 10.18% and 8.86% during the third and fourth quarters of 2021, respectively.

On Wednesday, Fitch praised PacWest’s record of “strong asset quality, low credit losses, consistent financial performance and stable deposit base” and said the short-term issuer default rating for PacWest would remain unchanged, while the rating outlook is now “stable.”

PacWest is embarking on a CEO transition. In June the company, which has $41 billion of assets, announced that Wagner, who has been chief executive for 22 years, will retire at the end of 2023 and will be succeeded by Paul Taylor, who became president of PacWest on July 1.

Wagner has been at the forefront of significant growth. He took over when the bank had less than $1 billion of assets. In the past five years, the company has nearly doubled in size.