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Investing.com -- Moody’s Ratings has improved the long-term ratings and assessments of Flagstar Financial, Inc. (FLG), including its long-term issuer rating, which has been upgraded to B1 from B2. The rating for Flagstar Bank, NA, the lead bank of FLG, has also been upgraded, with its long-term deposits rating now at Ba1, up from Ba2.
The same positive trend has been reflected in the ratings of Flagstar Bancorp (NYSE:FBC), Inc.’s subordinate debt, which has been upgraded to B1 from B2. The New York Community Capital Trust V’s backed preferred stock rating has been upgraded to B2 (hyb) from B3 (hyb). However, Flagstar’s short-term bank deposits, short-term counterparty risk ratings, and short-term counterparty risk assessment have all been affirmed at Not Prime.
The positive outlook for FLG’s long-term issuer rating and Flagstar’s long-term bank deposits and issuer ratings has been maintained. The upgrade and positive outlook are attributed to significant measures taken by Flagstar over the past year to enhance its risk governance and infrastructure, and to the bank’s considerably improved capital and reserve positions.
In the past year, Flagstar has invested heavily in improving its credit, risk, compliance, audit, IT, and finance functions to fortify its overall risk and compliance framework. The bank has also made strategic hires in its loan modification and workout groups, as well as its second and third lines of defense. These enhancements have led to a change in Flagstar’s governance issuer profile score (IPS) to G-4 from G-5, and its ESG credit impact score (CIS) to CIS-4 from CIS-5.
Flagstar’s capitalization strengthened in 2024, with its tangible common equity (TCE)/risk-weighted assets (RWA) ratio increasing to 11.7% at the end of December 2024, up from 9.0% at the end of December 2023. This improvement occurred despite a $1.1 billion loss for the year, driven by a $1.05 billion capital injection, a significantly lower payout ratio, net gains from the sale of select businesses and assets, and a reduced total asset base.
The bank’s improved deposit funding profile also supports the upgrade and positive outlook, with about 83% of deposits either insured or collateralized at the end of December 2024, a substantial increase from 67% at the end of December 2023. The bank’s use of market funding and brokered deposits has also improved, reducing its reliance on higher cost and more volatile wholesale funding sources.
Flagstar has also reduced risk in its commercial real estate (CRE) loan portfolio and increased its allowance for credit losses (ACL) for loans held for investment to 1.76% from 1.17% over 2024. The bank’s CRE loan balance declined 9% over the past year to $45.9 billion.
Flagstar’s long-term ratings could be further upgraded if it maintains a TCE/RWA ratio above 10.5% and demonstrates a path to achieving a consistent return on assets above 0.5% without incurring further outsized losses on its loan portfolio or lower deposits. The ratings could also be upgraded if Flagstar demonstrates a sustained improvement in governance, oversight, risk management and internal controls.
On the other hand, a return to a stable outlook or a downgrade could occur if capital as measured by TCE/RWA falls below 10.5%, its use of market funding expands in relation to deposit funding, or if its liquidity or profitability weakens. A downgrade could also be triggered if credit performance deteriorates significantly or if further challenges in governance, oversight, risk management and internal controls emerge.
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