Fitch raises Computershare Trust Company’s long-term IDR to ’BBB+’

Investing.com -- On Thursday, Fitch Ratings upgraded the Long-Term Issuer Default Rating (IDR) of Computershare Trust Company, National Association (CTCNA) to ’BBB+’ from ’BBB’. Fitch also elevated CTCNA’s Short-Term IDR to ’F2’ from ’F3’. The ratings agency has maintained a Stable outlook for CTCNA and affirmed the firm’s Shareholder Support Rating (SSR) at ’bbb’.

The upgrade is a reflection of an assessment of CTCNA’s standalone credit profile (SCP), as per the Non-Bank Financial Institutions (NBFI) Rating Criteria. Previously, CTCNA’s ratings were based solely on Fitch’s view of support from its parent company, Computershare Limited (CPU). However, Fitch now believes that an independent assessment using NBFI Criteria is more fitting as CTCNA operates autonomously from its parent, with its own management, technology, and workforce.

CTCNA, a non-deposit taking federal bank regulated by the Office of the Comptroller of the Currency (OCC), has a limited potential contagion risk linked to the use of shared branding. However, Fitch believes this risk is somewhat mitigated by CTCNA’s institutional client base and the stability of its business.

The SSR reflects Fitch’s view that CTCNA plays a significant strategic role within the Computershare group, especially following the merger with Wells Fargo (NYSE:WFC)’s Corporate Trust Services, which significantly increased CTCNA’s size and scope. The SSR indicates the minimum level to which CTCNA’s IDR could fall if Fitch does not change its view on potential support from CPU.

CTCNA’s business model is cash generative, with no debt, strong profitability, solid liquidity, and a reasonable dividend payout ratio. As of June 30, 2024, CTCNA managed $5.8 trillion of debt, $342.7 billion of assets, and $1.3 trillion in disbursements over the previous twelve months.

CTCNA’s profitability, measured by EBITDA to total gross operating income, was 53.3% in 2024, which was above the four-year average of 51.4%. Fitch anticipates ongoing improvement in FY25, driven by additional operational efficiencies from scale enhancements.

CTCNA’s common equity Tier 1 (CET1) ratio is exceptionally strong at 162.9% at the end of 2024, well above the regulatory minimum of 7%. The firm’s risk-weighted assets (RWA) are minimal, given its light balance sheet usage and absence of deposit or lending activities.

The company’s liquidity is viewed as strong, with $364 million of unrestricted cash and $150 million of available capacity on its revolving credit facility. The company’s dividend policy is deemed manageable due to its strong cash flow generation capabilities, with a dividend payout ratio of 139.1% in 2024.

However, Fitch views CTCNA’s funding profile, which relies solely on equity capital, as less diversified than higher-rated peers. Also, at the end of 2024, goodwill and intangibles comprised 52.3% of total balance sheet assets, which Fitch believes heightens the risk of impairment in unfavorable economic conditions.

The Stable Outlook reflects Fitch’s expectation that CTCNA will continue to grow its assets under administration, demonstrate consistent operating performance, and maintain strong profitability with no meaningful increase in leverage.

Negative rating action could be triggered by a material deterioration in operating performance, a significant decrease in the firm’s CET1 ratio or Tier 1 leverage, an increase in gross debt to EBITDA to above 1.0x, or a significant reduction in liquidity.

Positive rating action could result from an increase in scale and product diversity, or an improved funding profile, as demonstrated by access to unsecured debt markets and more diversified funding sources. The SSR and Short-Term IDR are primarily sensitive to changes in CPU’s ratings and, secondarily, to changes in Fitch’s assessment of the probability of support being extended to CTCNA from CPU.

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