OREANDA-NEWS. Fitch Ratings has affirmed UMB Financial Corp.'s (UMBF) ratings at 'A+/F1'. The Rating Outlook has been revised to Negative from Stable.

The rating action follows a periodic review of the midtier regional banking group, which includes BankUnited Inc. (BKU), BOK Financial Corp. (BOKF), Cathay General Bancorp (CATY), East West Bancorp (EWBC), First Republic Bank (FRC), First Horizon National Corp. (FHN), First National of Nebraska Inc. (FNNI), Fulton Financial Corp. (FULT), Hilltop Holdings, Inc. (HTH), Synovus Financial Corp. (SNV), TCF Financial Corp. (TCB), Trustmark Corp. (TRMK), UMB Financial Corp. (UMBF) and Wintrust Financial Corp. (WTFC).

Company-specific rating rationales for the other banks are published separately, and for further discussion of the midtier regional bank sector in general, refer to the special report titled 'US Banks: Midtier Regional Bank Periodic Review,' to be published shortly.

KEY RATING DRIVERS

IDRs, VRs, AND SENIOR DEBT

UMBF is the highest rated bank within the midtier regional peer group and one of the highest rated banks globally. The company's relatively high rating has historically reflected its steady operating performance, strong liquidity and very strong credit quality over multiple business cycles due to UMBF's stable, conservative risk appetite through frothy and down markets. Today's affirmation reflects the company's continued strength in revenue diversity, in liquidity and in UMBF's extremely low funding costs relative to peers.

The Rating Outlook revision to Negative from Stable reflects Fitch's concerns surrounding recent events and trends that may not align with attributes associated with such a high rating. These include the expectation that UMBF's operating performance will be challenged going forward as asset management business (namely, Scout Funds) has been experiencing noticeable headwinds, evidenced by material outflows from one of its flagship funds. These headwinds have put a drag on overall earnings of the company and played a prominent role in the company announcing strategic expense initiatives in 2015. Moreover, the revision reflects continued softening in UMBF's asset quality over recent periods, such that nonperforming asset levels are no longer such a positive outlier within Fitch's bank rated universe. Finally, the Outlook revision reflects recent unforeseen and sudden executive management turnover, a key rating sensitivity Fitch has pointed to in the past.

In Fitch's view, these factors point to idiosyncratic strategic challenges being experienced by UMBF. While management is attempting to address these challenges through the aforementioned expense initiative, the Negative outlook reflects Fitch's view that long-term outcomes may not be reflective of its current 'A+' rating.

UMBF continues to generate a significant amount of fee revenue compared to peers and the industry as a whole, driven by its suite of ancillary but core lines of business. These business lines including asset management and asset servicing have historically protected earnings from significant volatility over the long-run. Fitch views UMBF's revenue diversity as a credit positive which supports a relatively higher rating compared to its peers over the long run.

Over the last year, however, UMBF's asset management business line has seen pressure on the level of revenue which has translated into lower returns for the overall company. Quarterly fee revenue generated out of UMBF's Institutional Investment Management unit fell to $21.4 million in 3Q15 after averaging well over $30 million per quarter in 2013 and 2014. This is almost exclusively driven by consistent outflows within Scout Fund's international equity-focused fund due to relatively lower return levels compared to similar funds. While Scout's fixed income-focused funds have seen net inflows over a similar time frame, margins generated by these types of funds are typically lower than equity-focused funds. UMBF's strong company profile is tightly tied to the performance of its Scout Funds and the revenue generated out of them. Fitch views the significant outflows due to underperformance and subsequent drop in revenue as a credit negative trend. This view is incorporated in the Outlook being revised to Negative.

These revenue challenges have unmasked operational inefficiencies throughout the bank and resulted in operating performance well-below similarly rated banks and Fitch's expectations. The company has generated an average ROA of 65bps the last five quarters and an efficiency ratio of nearly 80%.

In light of this, UMBF announced an expense reduction initiative in 3Q15 and a subsequent one in 4Q15 in order to boost returns. The plans include actions such as combining various business lines, simplifying and streamlining back-office functions and modernizing technology. Management has indicated that this initiative could result in a reduction in annualized expenses by $22.6 million in 2016 and $32.9 million in 2017 and beyond. Fitch generally views these strategic initiatives neutrally relative UMBF's current rating as it should bring UMBF's annual overhead expenses in-line with the industry.

Fitch characterizes UMBF's risk appetite as more conservative than peers which has historically supported a relatively higher rating. This is evidenced by much lower and less volatile net charge-offs (NCOs) through the last business cycle. While Fitch believes that UMBF has remained conservative in its credit underwriting as its credit group has remained relatively unchanged, the company has consistently exhibited relatively higher loan growth (even when excluding recently acquired Marquette Financial Companies) compared to peers and the industry. Legacy loans grew over 13% between 3Q15 and 3Q14. Fitch notes that loan growth has primarily centered around C&I and CRE, spaces that Fitch has witnessed loosening underwriting within the industry as a whole, given that competition has been significant over recent periods.

Non-performing assets (NPAs) as a percentage of gross loans plus other real estate owned (OREO) remain lower than peer and the Fitch-rated universe average but have ticked up throughout 2015, counter to industry trends. At 3Q15, Fitch-calculated NPAs to loans plus OREO stood at 0.79%, a level not seen by the company since the financial crisis and up from 0.49% a year prior. The increase is primarily the result of deterioration in a handful of credits with some of it tied to the company's energy exposure which stood at 3.5% of total loans at 3Q15. Through the first nine months of 2015, UMBF had modified 16 commercial loans totalling $28 million. These trends aside, Fitch expects the company's asset quality to remain a relative rating strength compared to peers over the long-term and support an above-average rating, albeit potentially at a smaller rating differential. This expectation is incorporated into the rating affirmation today.
UMBF's liquidity and funding profile remain strong. The company consistently manages its loan-to-deposit (LTD) ratio well below its peers and the industry. At 3Q'15, the company's LTD was just over 60% and its cost of deposits was well-under peer averages. Fitch's expectation that the company's LTD will remain relatively low and it will maintain its lower cost of deposits is reflected in its relatively higher rating.

Fitch considers the stability of executive and senior management a key element of its assessment of an entity's management strength. UMBF's rating has historically been supported by the presence of a consistent executive management team with above average expertise in the bank's core competencies and markets. In 4Q15, UMBF unexpectedly announced the immediate resignation of president and Chief Operation Officer (COO) Peter deSilva, who oversaw UMBF's key fee revenue generating businesses. At the same time, Brian Walker relinquished his role as Chief Financial Officer. Mr. Walker maintained the title of the company's Chief Accounting Officer, a role he has held for around 10 years. In general, Fitch does not believe unexpected, significant management changes are events that are consistent with those exhibited by similarly rated banks. This view is incorporated into the outlook revision to Negative.

LONG- AND SHORT-TERM DEPOSIT RATINGS

UMBF's uninsured deposit ratings at the subsidiary banks are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.

HOLDING COMPANY

UMBF's IDR and VR are equalized with those UMB Bank, NA, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities.

SUPPORT RATING AND SUPPORT RATING FLOOR

UMBF has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, UMBF is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support.

RATING SENSITIVITIES

VR, IDRs, AND SENIOR DEBT
Today's Outlook revision from Stable to Negative reflects Fitch's view that there is potential downside to UMBF's current ratings over the rating time horizon.

UMBF's ratings would likely be downgraded should Fitch observe sustained softness in the company's operating performance due to continued outflows from its asset management business, particularly in its higher margin equity funds. Moreover, UMBF's ratings are also sensitive to management's ability to successfully execute on its announced expense initiative leading to overhead and efficiency ratios in-line with industry.

As noted above, Fitch incorporates a relatively conservative risk appetite and culture within UMBF's current rating. This includes the way in which credit is underwritten as well as the way capital and liquidity are managed. Should UMBF exhibit signs that it is willing to operate with even a marginally higher risk appetite, Fitch would likely take adverse rating action. This could be reflected in the company managing its regulatory Common Equity Tier 1 (CET1) ratio below 11.5% and/or raising its LTD ratio nearing or surpassing 70%, both through continued, outsized loan growth.

Finally, Fitch will continue to monitor UMBF's asset quality trends. Should Fitch observe credit trends that continue to run counter to historical performance or industry performance, pressure would likely be placed on the company's ratings.

LONG- AND SHORT-TERM DEPOSIT RATINGS

The long-and short-term deposit ratings are sensitive to any change to UMBF's long-and short-term IDR.

HOLDING COMPANY

Should UMBF's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies.

SUPPORT RATING AND SUPPORT RATING FLOOR

Since UMBF's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future.

Fitch has affirmed the following ratings with a Negative Outlook:

UMB Financial Corp.
--Long-Term IDR at 'A+';
--Short-Term IDR at 'F1';
--Viability Rating at 'a+';
--Support Floor 'NF'
--Support '5'.

UMB Bank, National Association
--Long-Term IDR at 'A+';
--Long-Term Deposit at 'AA-';
--Short-Term IDR at 'F1';
--Short-Term Deposits at 'F1+';
--Viability Rating at 'a+';
--Support Floor at 'NF';
--Support at '5'.