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Rating Action:

Moody's affirms Cullen/Frost's ratings and maintains a stable outlook

23 Aug 2018

New York, August 23, 2018 -- Moody's Investors Service ("Moody's") has affirmed all ratings of Cullen/Frost Bankers, Inc. and its bank subsidiary, Frost Bank (together referred to as Cullen/Frost). Frost Bank is rated Aa3/Prime-1 for long- and short-term deposits, its standalone baseline credit assessment (BCA) is a2, its counterparty risk assessments are A1(cr)/Prime-1(cr), and its local and foreign currency counterparty risk ratings are A2/Prime-1. Cullen/Frost Bankers, Inc. has a long-term issuer rating and a subordinate debt rating of A3 and a preferred stock non-cumulative rating of Baa2 (hyb). The outlook remains stable. The ratings affirmation and stable outlook reflect Cullen/Frost's improved capitalization and profitability, strong liquidity profile and asset quality track record, as well as its concentrated business in wholesale banking in Texas.

Affirmations:

..Issuer: Frost Bank

.... Adjusted Baseline Credit Assessment, Affirmed a2

.... Baseline Credit Assessment, Affirmed a2

.... Long term Counterparty Risk Assessment, Affirmed A1(cr)

.... Short term Counterparty Risk Assessment, Affirmed P-1(cr)

.... Local Currency Long term Counterparty Risk Rating, Affirmed A2

.... Local Currency Short term Counterparty Risk Rating, Affirmed P-1

.... Foreign Currency Long term Counterparty Risk Rating, Affirmed A2

.... Foreign Currency Short term Counterparty Risk Rating, Affirmed P-1

.... Long term Deposit Rating, Affirmed Aa3, outlook stable

.... Short term Deposit Rating, Affirmed P-1

.... Issuer Rating, Affirmed A3, outlook stable

..Issuer: Cullen/Frost Bankers, Inc.

.... Long term Issuer Rating, Affirmed A3, outlook stable

....Subordinate Regular Bond/Debenture, Affirmed A3

....Preferred Stock Non-cumulative, Affirmed Baa2 (hyb)

....Senior Unsecured Shelf, Affirmed (P)A3

....Subordinate Shelf, Affirmed (P)A3

....Preferred Shelf, Affirmed (P)Baa1

....Preferred Non-cumulative Shelf, Affirmed (P)Baa2

..Issuer: Cullen/Frost Capital Trust II

....Gtd Preferred Stock, Affirmed Baa1 (hyb)

Outlook Actions:

..Issuer: Frost Bank

....Outlook, Remains Stable

..Issuer: Cullen/Frost Bankers, Inc.

....Outlook, Remains Stable

RATINGS RATIONALE

The affirmation of Cullen/Frost's ratings and a2 BCA reflects Moody's views of the firm's conservative risk culture, strong profitability, solid capitalization, and its good liquidity profile, supported by its sizeable holdings of liquid assets and core deposit funding base. The stable ratings outlook reflects Moody's view that the bank's strong liquidity profile and asset quality will persist as well as its asset concentrations, which Moody's views as its key credit challenge.

Cullen/Frost has a strong track record of good asset quality despite its concentration in commercial banking in Texas as well as large loans above $10 million, which account for roughly half of the loan portfolio. Additionally, the bank has a lending concentration to the energy sector, though it has performed well despite industry stress amid the recent price downturn. Positively, the firm's energy portfolio as a percentage of its Moody's adjusted tangible common equity (TCE) has declined from 91% at year-end 2015 but remains sizable at 61% as of 30 June 2018. Its cumulative energy loan losses have been lower than other energy-concentrated peers and below Moody's baseline expectations during the energy downturn. Nonetheless, the bank's asset concentrations remain credit challenges.

Cullen/Frost's capitalization has improved in recent years, as evidenced by an increase in its Moody's TCE as a percentage of risk-weighted assets (Moody's TCE ratio) of 12.45% as of 31 March 2018, from 11.05% at year-end 2015. The improvement in capital position has been driven by an increasing contribution from retained earnings and moderate shareholder payouts. Cullen/Frost's net income as a percentage of tangible banking assets (net income ratio) has historically had low volatility, owing to low credit costs and good fee revenue. The bank's profitability has improved in recent periods thanks to rising interest rates and lower corporate taxes. Its net income ratio had been in line with the peer median in the low interest rate environment, but has risen above the peer median since 2016 exhibiting a stronger earnings profile than peers.

Cullen/Frost's key credit strength remains its liquidity profile, which is illustrated by sizeable holdings of liquid assets and core deposit funding. Cullen/Frost's core deposit funding of $26.9 billion was twice the size of its $13.4 billion loan portfolio, as of 31 March 2018, resulting in a very low market funds reliance at 3.5% of tangible banking assets as of the same reporting date. Combined with other liquid assets, Cullen/ Frost's securities portfolio accounts for roughly half of its tangible banking assets. While 62% of its $10.7 billion available-for-sale securities portfolio is made up of state and local municipal bonds, they are of high credit quality with roughly two-thirds guaranteed by the Texas Permanent School fund, which Moody's rates Aaa.

What Could Change the Rating Up

Upward rating pressure could emerge if Moody's views diminished concentration risk, in either Cullen/ Frost's energy portfolio, large loans or commercial lending focus in Texas, without increasing its risk profile. A sustained improvement in the bank's capital position and profitability profile, while maintaining strong core deposit funding and a liquid balance sheet, could add upward rating pressure.

What Could Change the Rating Down

Downward rating pressure could occur if the bank weakened its capitalization, liquidity profile, and credit risk appetite, which could be evidenced by a more rapid loan growth than peers.

The principal methodology used in these ratings was Banks published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Megan Fox
AVP-Analyst
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

M. Celina Vansetti-Hutchins
MD - Banking
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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