Fitch Affirms Federal Home Loan Bank of Atlanta's IDR at 'AAA'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the Federal Home Loan Bank of Atlanta's (FHLBATL) Long-term Issuer Default Rating (IDR) at 'AAA'. Fitch has also affirmed and withdrawn FHLBATL's Viability Rating (VR) at 'bbb+'.
Fitch is withdrawing the VR of the Federal Home Loan Bank of Atlanta as it is no longer considered by Fitch to be relevant to the agency's coverage. Fitch initially assigned the VR to distinguish letters of credit (LOCs) issued by FHLB Atlanta from FHLB obligations specifically covered by the System's joint and several guarantee provisions. Fitch no longer considers this distinction necessary since draws on LOCs funded by debt issued by FHLB Atlanta would benefit from mutual support mechanisms.
These rating actions follow Fitch's affirmation of the U.S. sovereign 'AAA' IDR and Stable Rating Outlook as described in a press release dated April 12, 2016.
A complete list of ratings follows at the end of this release.
KEY RATING DRIVERS - IDR, SUPPORT RATING & SUPPORT RATING FLOOR
FHLBATL's IDR and Support Rating Floor (SRF) are directly linked to the U.S. sovereign rating and will continue to move in tandem. Fitch believes that implicit sovereign support for the FHLB system would be forthcoming due to its important mission as it pertains to homeownership, serving as a source of liquidity to its members and the wide global distribution of FHLB debt.
As evidenced in the significant increase in consolidated obligations and advances during 2007 and 2008, the FHLB System provided much needed liquidity to its banking members, made possible by its access to the capital markets by virtue of its GSE status. FHLBATL's outstanding advances have since come down significantly and were $104.2 billion at Dec. 31, 2015, compared to $142.9 billion at Dec. 31, 2007.
FHLBATL's Support and SRF reflect Fitch's view that sovereign support would extend to FHLBATL and its consolidated obligations. Consequently, FHLBATL's Long-term IDR reflects implicit sovereign support.
KEY RATING DRIVERS - VR
The affirmation of FHLBATL's VR is supported by the strength of its company profile and exceptional franchise value. The bank, and Federal Home Loan Bank (FHLB) system in general, serve a public purpose and play an instrumental role in U.S. Housing Finance by providing stable, low-cost funding to American financial institutions to facilitate home mortgage, small business, rural, agricultural, and economic development lending. FHLBATL's franchise value is further strengthened by the vital role advances play in the business operations of member banks. Members utilize advances to fund new originations and existing portfolios of mortgages, purchase mortgage-backed securities, fund near term cash needs and manage market risk exposures. For smaller, community institutions, the FHLB remains the most economical source of accessing the credit markets.
It is important to note that the benefit the FHLB's GSE status adds to the business model is difficult to isolate. While Fitch's analysis of FHLBATL's VR is a standalone assessment of the issuer's standalone strength, its advantageous funding structure is directly tied to it's on going ability to raise a significant volume of funds in the capital markets. The FHLB's GSE status coupled with the "joint and several" liability of all 11 FHLB banks for the system's consolidated obligations allows the banks' financing affiliate to issue debt at very narrow spreads to U.S. Treasury yields. Fitch believes that without this advantage, the strength of the FHLB's business model would be diminished as elevated funding costs would result in increased borrowing costs for member banks and ultimately a lower demand for advances.
Fitch views FHLBATL's capital position as the primary limitation to its VR. The bank's tangible common equity and total regulatory capital ratios at year end 2015 of 4.93% and 4.89% are considered low on an absolute basis similar to system peers, although reflective of the FHLB's low loss experience on advances. Furthermore, the bank's outstanding letters of credit (LOC) represent 21.7% of total assets and have the potential to further diminish the capital position. Fitch believes simultaneous funding of the LOC portfolio is highly unlikely.
Conversely, Fitch views the bank's flexible equity structure, limited risk profile, and regulatory safeguards as credit strengths which support the preservation of modest capital levels. Member banks are required to capitalize all borrowings (typically 4% - 5% of advance) effectively creating additional loss absorbing capital as balance sheet leverage increases. The bank retains the ability to hold capital for up to five years to ensure sufficient capitalization during periods of economic stress. Recent growth in capital is attributed to the FHLB system's Joint Capital Enhancement agreement which allocates 20% of annual net income to a restricted retained earnings account. Fitch views the initiative positively as it results in growth of stable, high quality, loss absorbing capital.
FHLBATL's asset quality remains strong. Nonperforming assets remain very low and the bank has yet to experience credit losses on the advance portfolio during its operating history. Direct mortgage loan exposure is limited to 41 bps of total assets and is on the lower end of system peers. Moreover, the balance of private label mortgage backed securities (PLMBS) continues to decline and the asset class now represents 10.5% of total securities or 1.9% of total assets. Fitch views the declining balance of PLMBS and mortgage loans as a credit strength as it reduces exposure to mortgage products and allows the bank to focus on the core advance business.
Earnings are low and constrained by FHLBATL's cooperative structure. The bank's uniquely low funding costs are passed on to member banks, resulting in narrow net interest spreads. Conversely, this same structure allows the bank to maintain a relatively stable NIM as changes in funding costs are typically offset by commensurate changes in asset yields. Profitability measures have historically been and continue to remain below system peers as a result of the bank's lower risk balance sheet structure. Compared to system peers, the bank has more funds allocated to lower yielding advances than higher yielding investment securities and mortgage loans.
Earnings were slightly higher in 2015 as reduced interest earnings on advances and securities were offset by stronger performance on derivatives and hedges. Overall, noninterest income represented 48.1% of gross revenue, which is significantly higher than the 2014 level of 24.5% and remains the highest of all FHLB system banks. Fitch expects profitability to closely follow the NIM in the medium term, though derivatives and hedging activities could continue to cause some volatility in non-interest earnings.
RATING SENSITIVITIES - IDRs, SUPPORT RATING & SUPPORT RATING FLOOR
FHLB Atlanta's ratings are directly linked to the U.S. sovereign rating and will continue to move in tandem. If at some point in the future, Fitch views government support as being reduced, the ratings of the GSEs may be delinked from the sovereign and downgraded.
Deterioration in FHLBATL's available liquidity and/or inability to access capital markets over an extended period may result in negative rating actions, regardless of the U.S. sovereign rating.
RATING SENSITIVITIES - VR
Ratings sensitivities for FHLBATL's VR are not applicable given today's rating action.
Fitch has affirmed the following ratings:
Federal Home Loan Bank of Atlanta
--Long-term IDR at 'AAA'; Outlook Stable;
--Short-term IDR at 'F1+';
--Support at '1';
--Support Rating Floor at 'AAA'.
Fitch has affirmed and withdrawn the following ratings
--Viability Rating at 'bbb+'