Flagstar's Deposit Rating Upgraded by Moody's, Outlook Remains Positive

Flagstar Bank, N.A. FLG announced that its long-term deposit rating has been upgraded to Baa3 from Ba1 by Moody's Ratings (Moody's).The rating agency also upgraded the bank’s baseline credit assessment to ba2 from ba3. The outlook on the bank’s long-term deposit and issuer ratings remains positive.

Moody’s further upgraded Flagstar’s short-term deposit rating to Prime-3 from Not-Prime. Additionally, the bank’s long-term issuer rating was raised to Ba3 from B1, along with upgrades across counterparty risk ratings and subordinated debt instruments.

Notably, this marks the second major rating upgrade for FLG after a similar upgrade by Fitch Ratings in March, reflecting continued improvement in its financial and operating profile.

Reasons Behind the FLG’s Rating Upgrade

Remediation of Control Weaknesses: A key driver of the upgrade is FLG’s successful remediation of previously identified material weaknesses in internal controls over financial reporting, as evidenced by a standard unqualified audit opinion. This marks a critical inflection point in the bank’s governance and control framework after a prolonged period of elevated operational and reporting risk.

According to Moody’s, Flagstar has made significant investments in audit, risk, compliance and information technology over the past two years. The agency noted that this has improved the reliability of financial reporting and reduced execution risk, although risks related to the new management strategy remain.

Improving Profitability Profile: The rating action also reflects Flagstar’s return to profitability in the fourth quarter of 2025. The earnings improvement has been driven by net interest margin expansion, moderating credit costs and significantly lower operating expenses following balance sheet repositioning and cost reduction efforts.

Moody’s expects earnings to improve further while achieving a sustainable return on average assets above 0.5% without incurring outsized losses. This will be supported by growth in higher-yielding commercial and industrial (C&I) loans, reduced reliance on wholesale funding and normalization of credit costs as legacy commercial real estate (CRE) exposures decline. Although profitability could face some pressure as growth resumes and execution challenges persist, the recent improvement trend is considered sufficient to support the upgraded rating.

Strengthened Capital Position: The improved capital profile of FLG serves as a key support for the rating upgrade. The bank’s tangible common equity to risk-weighted assets (TCE/RWA) ratio has increased to nearly 13%, well above levels that previously constrained its credit profile, driven by capital actions, asset reductions, retained earnings and disciplined balance sheet management.

Moody’s expects the TCE/RWA ratio to remain above 10.5% over the medium term, even as loan growth resumes, providing a meaningful buffer against potential credit volatility. The stronger capital position enhances the bank’s loss absorption capacity and supports the execution of its strategic shift toward a more diversified and higher-return business mix.

Ongoing Credit and Funding Risks: Despite the upgrade, Flagstar’s baseline credit assessment remains below that of similarly rated banks, reflecting elevated credit risk due to a significant concentration in CRE, particularly with geographic concentration in New York. The bank is in the process of shifting toward C&I lending, a transition that will take time to demonstrate stability. While funding metrics have improved, the bank continues to rely more on wholesale funding compared with peers.

Factors Influencing Future Ratings of FLG

The positive outlook reflects Moody’s expectation that Flagstar will continue to reduce its CRE concentration while expanding its C&I loan portfolio and lowering dependence on wholesale funding.

An upgrade could occur if the bank demonstrates sustained earnings stability, maintains capital levels comfortably above 10.5%, and successfully executes its portfolio transition. Conversely, downward pressure could arise from weaker profitability, rising nonperforming loans or increased reliance on short-term wholesale funding.

Our Take on FLG

The upgrade by Moody's Ratings reflects meaningful progress in Flagstar Bank’s turnaround, particularly in governance, profitability and capital strength. While risks related to CRE concentration and funding structure remain, continued execution of its strategic shift toward C&I lending and stable earnings generation could support further rating improvements over time.

FLG’s Price Performance and Zacks Rank

Over the past year, shares of FLG have risen 27.9%, outperforming the industry’s growth of 21.8%.

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Currently, FLG carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Rating Action on Other Banks

In February 2026, Fitch Ratings noted that UBS Group AG’s UBS 2025 results reinforced the positive outlook on its ‘A’ long-term issuer default rating (IDR). The bank reported an operating profit-to-risk-weighted assets ratio of 1.8%, or 2.4% after adjusting for integration-related impacts, reflecting a strengthening earnings trajectory following the Credit Suisse integration.

Earlier, in May 2025, Fitch Ratings had revised the outlook of UBS Group and UBS Switzerland AG to Positive from Stable. The revision reflected Fitch’s expectation that UBS’s well-advanced integration of Credit Suisse will continue to reduce execution risks while improving profitability. UBS currently carries a Zacks Rank #3

In November 2025, Zions Bancorporation N.A. ZION announced that S&P Global Ratings revised the bank’s outlook to Stable from Negative while affirming its ‘BBB+’ long-term issuer credit rating.

The outlook revision reflects ZION’s improving financial profile, supported by higher capital ratios, stable deposits, and expanding net interest margin. The rating agency also noted that the bank maintains solid asset quality and stable funding, which are expected to support consistent profitability and gradual capital improvement over the next two years. ZION currently carries a Zacks Rank #3.

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