DBRS Comments on Regions’ 2Q12 Results – Sr. Debt at BBB; Trend Stable; Ratings Unaffected

DBRS, Inc. (DBRS) has today commented that its ratings for Regions Financial Corporation (Regions or the Company), including its BBB Issuer & Senior Debt rating, are unchanged following the release of the Company’s 2Q12 earnings. The trend on all ratings is Stable. For the quarter, Regions reported net income available to common shareholders of $284 million, up from $145 million in 1Q12. Second quarter results were negatively impacted by the repayment of TARP, which resulted in the acceleration of accretion of the discount related to the preferred shares that in combination with the final preferred stock dividend reduced net income by $71 million. DBRS notes also that 2Q12 results included net income of $4 million related to discontinued operations, compared to a loss of $40 million in 1Q12.

In confirming Regions’ ratings and revising the trend to Stable in June, DBRS commented that the expectation for improving core earnings capacity was an important consideration in returning the trend to Stable. Regions reported that pre-tax pre-provision income from continuing operations, on an adjusted basis, increased $67 million, or 16%, from 1Q12 to $486 million in the second quarter consistent with DBRS’s view. The Company reported further growth in C&I lending (up 4% from 1Q12), which is a targeted growth area, while run-off portfolios (primarily investor CRE) were reduced further. In addition, Regions was able to further reduce its funding costs, reflecting the fact that the Company still has significant amounts of higher cost, time deposits that continue to roll off. This helped Regions’ NIM to rise 7 bps QoQ to 3.16%, despite the low rate environment. Second quarter earnings also benefited from further improvement in credit quality, which supported a provision for loan losses of $26 million that was down $91 million from 1Q12 and $239 million below 2Q12 net charge-offs.

Total revenues (from continuing operations) were $1.3 billion in 2Q12, down slightly from 1Q12 and down 4% from the pre-Durbin 2Q11. Net interest income increased $11 million from the first quarter to $838 million as the wider NIM offset a 1% decline in average earning assets. Reported noninterest income (from continuing operations) was $507 million in the quarter, down $17 million from 1Q12. Lower service charges that reflected Regions’ reserving for certain anticipated fee refunds to customers and weaker capital markets revenues drove the sequential quarter decline. This was partially offset by another strong quarter for mortgage banking. Mortgage revenues were $90 million in 2Q12, up 17% linked-quarter, and DBRS expects that fee revenues should continue to benefit from solid mortgage banking activity for the next few quarters.

Regions’ non-interest expenses from continuing operations declined 8% QoQ to $842 million in 2Q12. DBRS notes that first quarter expenses reflected seasonally higher salary and benefits expense and a $13 million annual dividend to a subsidiary. However, DBRS also sees the improvement as reflective of management’s continued focus on expense reduction and, as expected, Regions benefited from declining costs related to the credit environment. DBRS believes that expense control will remain important as Regions works to maintain, and increase, its earnings capacity in what is a challenging environment for revenue growth.

At June 30, 2012 Regions reported NPAs, excluding performing TDRs, of $2.3 billion, down 12% QoQ and down 35% YoY. NPAs as a percent of loans plus OREO, were 3.04% at the end of 2Q12 compared to 3.42% at the end of 1Q12. Including loans 90+ days past due, the Company’s NPA ratio was 3.57% at June 30, 2012, down from 3.97% at March 31, 2012. NCOs also declined in the quarter, down 20% to $265 million, though at 1.39% of average loans they remain somewhat elevated. Importantly, new NPL formation and early credit indicators also showed improvement supporting the noted decline in the provision. Regions’ allowance for loan losses declined 9% QoQ to $2.3 billion, but continues to provide ample protection, in DBRS’s view. At the end of 2Q12, the allowance represented 3.01% of total loans and covered 120% of NPLs (excluding performing TDRs).

Capital remains sound following the repayment of TARP and the completion of the sale of Morgan Keegan in the second quarter. At June 30, 2012, Regions’ Tier 1 Common ratio was an estimated 10.0%, up from 9.6% at the end of 1Q12, and its Tier 1 ratio was 11.0%, up from 10.5%, excluding TARP, in 1Q12. Regions estimates that at the end of 2Q12 its Basel III Tier 1 Common ratio, reflecting the recent NPR, was 8.0%.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include the company documents, 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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Mark Nolan
Approver: Roger Lister
Initial Rating Date: 5 July 2006
Most Recent Rating Update: 12 June 2012

For additional information on this rating, please refer to the linking document under Related Research.