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Rating Action:

Moody's assigns first-time A1 long-term deposit rating to Washington Federal Bank; outlook stable

28 Jan 2021

New York, January 28, 2021 -- Moody's Investors Service ("Moody's") has assigned first-time ratings to Washington Federal, Inc. (WaFd), and its lead bank Washington Federal Bank, N.A. (WaFd Bank). Moody's has assigned WaFd Bank an issuer rating of Baa1 and long- and short-term deposit ratings of A1/Prime-1, together with a standalone Baseline Credit Assessment (BCA) of a3. Moody's has also assigned long- and short-term Counterparty Risk Assessments of A2(cr)/Prime-1(cr) and long- and short-term Counterparty Risk Ratings of A3/Prime-2 to the bank. Moody's also assigned a Baa1 issuer rating at the holding company, WaFd. The ratings outlook for Seattle-based WaFd Bank and WaFd are stable.

Assigned;

..Issuer: Washington Federal, Inc.

....LT Issuer Rating (Local Currency), Assigned Baa1, Stable

..Issuer: Washington Federal Bank, N.A.

.... Adjusted Baseline Credit Assessment, Assigned a3

.... Baseline Credit Assessment, Assigned a3

....LT Counterparty Risk Assessment, Assigned A2(cr)

....ST Counterparty Risk Assessment, Assigned P-1(cr)

....LT Counterparty Risk Rating (Foreign Currency), Assigned A3

....LT Counterparty Risk Rating (Local Currency), Assigned A3

....ST Counterparty Risk Rating (Foreign Currency), Assigned P-2

....ST Counterparty Risk Rating (Local Currency), Assigned P-2

....LT Issuer Rating (Local Currency), Assigned Baa1, Stable

....LT Bank Deposits (Local Currency), Assigned A1, Stable

....ST Bank Deposits (Local Currency), Assigned P-1

Outlook Actions:

..Issuer: Washington Federal, Inc.

....Outlook, Assigned Stable

..Issuer: Washington Federal Bank, N.A.

....Outlook, Assigned Stable

RATINGS RATIONALE

WaFd Bank's a3 BCA and ratings reflect the firm's clear strategy as well as its excellent historical financial performance, robust capitalization and healthy liquidity profile. The BCA also takes into consideration the credit challenges that result from WaFd Bank's commercial real estate (CRE) concentration, construction in particular, and the risk to creditors from the bank's ongoing transformation from a residential mortgage focused thrift, into a more diversified commercial bank. That shift has resulted in the bank's rapid CRE growth and its declining, though still solid, operational efficiency and capitalization. Moody's assessment of WaFd Bank's credit fundamentals results in its bank-level BCA being positioned at the median of Moody's rated US bank universe, which is currently a3.

WaFd Bank's credit quality track record is a key credit strength. Annual net charge-offs as a percentage of average total loans have remained significantly below the level of all FDIC-insured banks since before the 2008/9 financial crisis. Moreover, WaFd has reported net recoveries on an annual basis since 2014. The bank's policy of retaining all originated loans on balance sheet and the tying of incentive compensation to credit quality further promotes prudent underwriting and strong asset quality.

Nonetheless, Moody's considers WaFd's CRE and construction concentrations as potential pockets of credit risk in a downturn. CRE, including construction, was 2.8 times tangible common equity (TCE) at 30 September 2020, a comparatively high level. Construction loans alone exceeded capital as of the same date, at 113% of TCE, a comparatively elevated level amongst rated US banks. An additional consideration is the rapid growth of WaFd's CRE and construction portfolios in the past few years, which introduces an element of unseasoned risk in Moody's assessment.

WaFd's capitalization is solid and well in excess of regulatory requirements. However, capital levels have trended downwards in recent years, with the common equity tier 1 capital ratio (CET1) falling from 26.9% in 2012 to 12.9% in 2020. Moody's notes that the capital reduction has been accompanied by a significant lowering of WaFd's historic interest rate risk, which resulted from the diversification of the bank's loan and deposit books over the past several years.

With respect to profitability, Moody's notes that along with many banks, WaFd experienced profitability pressure in 2020 due to falling interest rates and higher loan loss provisions. However, the bank's deposit mix shift away from CDs and into money market and non-interest bearing deposits helps to not only mitigate interest rate risk, but also to increase its profitability potential going forward. Still, WaFd is heavily reliant on net interest income, which accounts for the vast majority of its revenue.

With respect to WaFd's operational efficiency, the weaker years-long trend reflects the bank's transition into a more diversified commercial lender, elevated technology spending on important digitization initiatives, as well as higher regulatory costs, including Bank Secrecy Act/Anti-Money Laundering remediation. Moody's does not anticipate further deterioration of WaFd's cost/income ratio, which was slightly over 60% for the quarter ended 31 December 2020.

WaFd's funding and liquidity profile is robust and provides rating support. The bank is core funded with a good geographic mix of deposits for a small regional bank. Moody's does not consider WaFd to be reliant on confidence-sensitive market funding, though it does make use of FHLB financing, although much of it is longer-dated. WaFd's securities portfolio is made up of high quality bonds and US government backed securities and more recently, cash.

WaFd Bank's exposure to environmental and social risks is low and moderate, respectively, consistent with Moody's general assessment for the global banking sector. Moody's assesses governance risk as high, in line with all other US banks, but it does not have any particular concerns with WaFd Bank's governance. The bank shows an appropriate risk management framework commensurate with its risk appetite.

The stable outlook is a reflection of Moody's view that WaFd Bank's credit profile will remain stable over the next 12-18 months and that profitability will continue to remain under pressure against the backdrop of historically-low interest rates.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

A reduction of concentration risk, specifically lower CRE and construction concentrations, could result in upward pressure on WaFd's BCA, all else being equal. Significantly lower usage of FHLB financing due to further material improvement in WaFd's deposit mix could also result in a higher BCA. A higher BCA would likely lead to higher deposit and debt ratings.

The continued reduction in WaFd's capitalization could lead to a lower BCA, as could significantly weaker credit quality. A lower BCA would likely lead to lower deposit and debt ratings.

The principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Allen Tischler
Senior Vice President
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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