DBRS Comments on Regions' 1Q11 Results – Sr. Debt at BBB; Trend Negative; Ratings Unaffected

DBRS Inc. (DBRS) today commented that its ratings for Regions Financial Corporation (Regions or the Company), including its BBB Issuer & Senior Debt rating and Negative trend are unchanged following the release of the Company’s first quarter 2011 results. Regions reported earnings of $69 million in the quarter, a $20 million decrease from 4Q10 but a substantial improvement over the $196 million loss in 1Q10. DBRS sees the Company’s results as reflecting the progress the Company has made in dealing with its credit quality issues, but they also highlight the lagging pace of the credit quality improvement and the challenge that the Company faces in restoring profitability to pre-crisis levels.

Regions’ net revenues were $1.7 billion, down 18% from 4Q10 which had $333 million in security sales gains and several large investment banking transactions, but were up 3.8% from 1Q10. The Company took securities gains again by selling $2.4 billion in agency MBS for a gain of $82 million in the quarter and purchased new MBS, slightly extending duration. After adjustments for the securities gains and various charges, adjusted income before provisions and taxes (IBPT) was flat sequentially at $460 million in 1Q11 and up nearly 16% from 1Q10. Net income, however, benefited from a 29% ($200 million) quarterly decline in the provision for credit losses to $482 million while other credit costs also fell $34 million to comprise an improved but still significant 6% of adjusted expenses down from 9% the prior two quarters highlighting the credit drag. Importantly for DBRS, provisioning, while down considerably from peak levels, continues to exceed income before provisions and tax (IBPT). In 1Q11, provisions of $482 million represented 105% of the quarterly adjusted IBPT of $460 million, but reflected progress relative to the 148% result in the fourth quarter.

Average loans declined 2% over the quarter reflecting the struggle to originate quality loans with consumers continuing to deleverage and default while the Company also continues to work down its investor commercial real estate exposure, declining $1.4 billion in 1Q11. Positively, average Commercial and Industrial loans increased for the third consecutive quarter, up over 4% ($933 million) from 4Q10 and line utilization increased 140 basis points (bps) to 41.7%, but still was below the normal range in the high 40’s. DBRS anticipates that further meaningful improvement in loan originations beyond C&I will materialize only when businesses and households begin to benefit more extensively from the economic recovery and faster job creation.

The allowance for loan loss has been flat at $3.2 billion for five quarters as the provision has matched net charge-offs (NCOs), which have declined for two consecutive quarters. Many important asset quality metrics improved in the quarter including NCOs, NPL inflows, 90+ day past dues and business classified/special mention loans. The challenges continue for the Company however, as non-performing assets continued to rise (about 7%) and underperform large regional peers while both accruing and non-accruing restructured loans also grew 4.7% in the quarter. DBRS notes that Regions sold $219 million of non-performing loans in the quarter, down from $405 million in 4Q10 but indicated a focus on workouts going forward and away from sales due to economics at this point in the credit cycle.

With stability in the Company-wide allowance for credit losses, the Company’s reserves remain adequate but not robust in DBRS’s view. The Company’s allowance was $3.3 billion at quarter-end, representing 4.01% of loans and 83% of non-performing assets. DBRS is also mindful, however, that the Company has $1.6 billion of performing restructured loans (TDRs) on its balance sheet of which 82% were consumer loans which currently have a 20% redefault rate down from 22% in the fourth quarter.

Funding and liquidity remain sound, in DBRS’s view, with deposits funding the entire loan portfolio 1.18 times and an abundance of liquidity at a cost of 10 bps in 1Q11 NIM. Deposits continued to grow in the quarter with the mix of low cost deposits improving and lowering the overall deposit cost 5 bps over the quarter. The Company’s current estimated Tier 1 common equity ratio of 7.9% was flat over the quarter and the estimated Tier 1 ratio of 12.5% improved 10 bps but the tangible equity to tangible assets ratio fell 6 bp to 5.98%. DBRS notes that Region’s capital ratios lag both the average of its rated and large regional peer groups. The Company reported a proforma Basel III Tier 1 Common Capital ratio of 7.5% and is well-positioned with respect to the LCR liquidity requirement. The regulatory capital ratios included $846 million in qualifying trust preferred securities (90 bps to Tier 1) that are scheduled to be phased out beginning in 2013 and excluded $463 million in deferred tax assets. At year end, Region’s $3.5 billion of TARP preferred shares remain outstanding.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments, and Rating Bank Preferred Shares and Equivalent Hybrids, all of which can be found on the DBRS website under Methodologies.

The sources of information used for this rating include the company documents, company presentations, company call transcripts, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: William Schwartz
Approver: Roger Lister
Initial Rating Date: 5 July 2006
Most Recent Rating Update: 23 November 2010

For additional information on this rating, please refer to the linking document below.