First Horizon Ratings Affirmed By Moody's, Outlook Stable

Ratings of First Horizon National Corporation (NYSE:FHN) and its bank subsidiary, First Horizon Bank, have been affirmed by Moody’s Investors Service, a rating arm of Moody's Corporation (NYSE:MCO) . The parent company has a long-term issuer rating and a senior unsecured rating of Baa3.

The subsidiary’s baa2 standalone baseline credit assessment has also been affirmed. Also, it has been rated A3/Prime-2 for long- and short-term deposits. Counterparty Risk Ratings of Baa2/Prime-2 and Counterparty Risk Assessments of Baa1(cr)/Prime-2(cr) of the subsidiary was also maintained.

Notably, the rating outlook has been maintained at ‘stable’.

The rating action follows the recent announcement of First Horizon’s all-stock merger of equals with IBERIABANK (NASDAQ:IBKC) . However, the deal awaits certain customary approvals by shareholders of both companies and other certain conditions. The transaction is anticipated to close in second-quarter 2020.

Rationale behind the Affirmation

Moody's affirmation of ratings reflects the assessment that the credit profile of the combined entity will mostly be parallel to First Horizon. Notably, the bank’s enhanced asset risk as well as its strong core retail banking franchise in Tennessee, which supports its core deposit funding profile, is the key factor.

Per Moody’s, though the latest deal might escalate integration risks for the bank due to the size of the transaction, the merger of equals will expand the footprints with enhanced balances of loan and deposit and boost profitability with cost savings. However, any operational issue might affect the financial position and performance of the combined entity, which will likely be countered by management, increasing First Horizon’s risk appetite to restore profitability.

On the downside, ratings suggest weaker capitalization and profitability than peers. After the deal’s closure, First Horizon seeks to operate within its CET1 ratio target range of 9-9.5%.

Moody’s finds First Horizon's funding profile to be impressive as it is supported by solid core deposit funding, which fully funds the loan portfolio and reflects the strength of its dominant market position in home state of Tennessee. The ratings outlook affirmation highlights the agency’s expectation of maintaining the funding profile over the next 12-18 months, post-merger though it will be more leveraged than peers.

Factors That Might Trigger Change in Ratings

An upward ratings change can happen if the company is able to improve and maintain capitalization, and displays bondholder-friendly approach to capital management, along with maintenance of good asset quality performance.

However, further weakening in First Horizon's capitalization, together with significant deterioration in asset quality in either its originated portfolio or acquired portfolio, might exert downward rating pressure.

Shares of the company have gained 31.3% year to date compared with 21.2% growth recorded by the industry.

First Horizon currently carries a Zacks Rank #3 (Hold).

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