DBRS Confirms Regions Financial Corporation at BBB: Stable Trend

DBRS, Inc. (DBRS) has today confirmed its ratings for Regions Financial Corporation (Regions or the Company) and Regions Bank, its bank subsidiary, including its BBB Issuer & Senior Debt rating. At the same time, DBRS assigned a B (high) rating to Regions’ recently issued preferred stock. DBRS also discontinued the ratings of the Company’s trust preferred securities, which were redeemed. The trend for all ratings is Stable. These rating actions follow a detailed review of the Company’s operating results, financial fundamentals and future prospects.

The ratings confirmation and Stable trend reflect Regions’ geographically diverse, appealing, and well-entrenched banking franchise, its ample funding position, and its solid capital profile. Ratings also consider the Company’s relatively sound asset quality, which still lags similarly sized regionals, and its strained core earnings generation, which remains pressured by the difficult business environment and continuing de-risking of the balance sheet. DBRS notes that sustained incremental improvement in franchise strength, including execution, and continued improvement in core earnings and asset quality could result in positive ratings pressure.

Ratings are underpinned by Regions’ deeply entrenched banking franchise with branches located across 16 states in the South, the Midwest and Texas. The Company enjoys defensible deposit market shares across many of the states, including the number one position in Alabama with a dominant 25% market share, the number two position in both Mississippi and Tennessee with market shares of 14% in each state, and the fourth leading position in both Florida and Louisiana with deposit market shares of 4% and 8%, respectively.

A challenge for the Company continues to be the rebuilding of its core earnings capacity, which has been pressured by loan contraction over the past few years, mostly due to the managed run-off of investor CRE and investor construction loans. Indeed, the de-risking of the balance sheet along with a difficult business environment continues to pressure core revenue generation. Importantly, the Company has gained some traction in reducing its core non-interest expenses to partially offset these headwinds.

Positively, 2Q13 results reflected the first quarterly increase in the Company’s loan portfolio since 2Q09, driven by growth in commercial and industrial and indirect loans, and a moderating decline in total investor real estate exposure. DBRS looks favorably upon the Company’s recent capital efficiency actions, and capacity to reduce its funding costs, as it has approximately $3.6 billion of costlier time deposits that mature in 2H13. Moreover, with an asset sensitive balance sheet, net interest margin should benefit from rising interest rates.

The Company’s asset quality is relatively sound and improved. However, the pace of improvement continues to lag that of its larger regional peers. In part, this is due to Region’s willingness to work with its customers and their credit issues and not sell loans without compelling economics. DBRS is mindful that Regions troubled debt restructurings (TDRs) are declining but remain elevated relative to most peers. TDRs totaled $3.3 billion at June 30, 2013 ($4.0 billion at June 30, 2012), including residential mortgage TDRs, which represented 35% of total TDRs, and investor real estate TDRs which represented 29%. At the end of 2Q13, 22% of TDRs were 90 days or more past due or on nonaccrual compared to 26%, at June 30, 2012. Providing a degree of comfort, DBRS notes that reserves have been established for accruing, as well as non-accruing balances.

Credit metrics continue to improve. At June 30, 2013, the Company reported non-performing assets (NPAs) of $1.7 billion, down 5.2% sequentially and down 27.3%, year-on-year. NPAs (as a percent of loans plus other real estate owned) were still a relatively high 2.25% of loans at the end of 2Q13, but down from 2.41% at March 31, 2013, and 3.04% at June 30, 2012. Meanwhile, during 2Q13, net charge-offs (NCO) declined 20% to $144 million and represented 0.77% of average loans, down from 0.99% for 1Q13 but above peers. Positively and perhaps signaling continuing future credit quality improvement, criticized and classified loans continued to decline. Although NCOs outpaced provisions by $113 million, Regions’ loan loss reserves of $1.64 billion continue to provide ample protection, in DBRS’s view. At the end of 2Q13, the allowance represented 2.18% of total loans and covered 109% of NPLs (excluding loans held for sale).

Overall, Regions’ funding and liquidity profile is strong, underpinned by an ample core deposit base that represented 119% of net loans (DBRS calculated), up from a pre-crisis level of 78% at the end of 2007. The Company’s deposit mix continued to improve, as maturing time deposits were not replaced and the cost of its interest bearing deposits is lower than peers. Rounding out its liquidity profile, Regions has a high quality securities portfolio, which represented 21% of total assets, and access to the Federal Reserve and FHLB. DBRS notes that holding company fundamentals are also solid.

DBRS views the Company’s capital position as sound and improved. At June 30, 2013, Regions’ Tier 1 common ratio was 11.09%, up from 10.00% at June 30, 2012, while its Tier 1 capital ratio was 11.59% (11.02% at June 30, 2013) and Total capital ratio was 14.69% (14.50%). Moreover, Regions’ Tier 1 common ratio under Basel III rules was a solid 10.31%, reflecting a substantial cushion above the minimum requirement. Regions’ performance in the most recent round of regulatory stress tests provides additional comfort regarding the adequacy of capital and the Company’s ability to withstand a stress scenario. DBRS notes that under the CCAR 2013 “Severely Adverse Scenario” with planned capital actions, Regions’ minimum stressed Tier 1 common ratio was in the top half of the 18 banks subject to the review.

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 applicable methodologies include the DBRS Criteria: Intrinsic and Support Assessments, DBRS Criteria: Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments, and DBRS Criteria: Rating Bank Preferred Shares & Equivalent Hybrids. These can be found at: http://www.dbrs.com/about/methodologies

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

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

[Amended on August 28, 2014, to reflect actual methodologies used.]

Lead Analyst: Mark Nolan
Rating Committee Chair: 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.