DBRS’ Ratings on Regions Financial Unchanged after 3Q13 Results – Sr. Debt at BBB, Stable Trend

DBRS, Inc. (DBRS) has today commented that its ratings for Regions Financial Corporation (Regions or the Company), including its Issuer & Senior Debt rating of BBB are unchanged following the release of 3Q13 results. All ratings have a Stable trend. For the quarter, Regions reported net income available to common shareholders of $285 million, up from $259 million for 2Q13, yet down from $301 million for 3Q12. Higher QoQ earnings mostly reflected the non-recurrence of a 2Q13 $56 million loss on early extinguishment of debt, and a $24 million gain on the sale of a non-core portion of the Company’s wealth management business.

Despite pressured core earnings generation, Regions’ balance sheet fundamentals remained sound during 3Q13 and included sustained improvement in asset quality, continued average loan growth, and the maintenance of solid liquidity and capital positions.

On a core basis, earnings were down QoQ, as Regions’ DBRS calculated 3Q13 adjusted income before provisions and taxes (IBPT) decreased by 11.9% sequentially to $413 million. Lower adjusted IBPT reflected a 6.2% increase in adjusted expenses and a modest 0.4% decrease in total revenues. Higher expenses reflected increased levels of legal/professional fees, compliance/risk management infrastructure costs, and provisions for unfunded credit commitments. Going forward, management anticipates that full year 2013 expenses will be modestly lower than those of 2012.

Slightly lower QoQ adjusted revenues reflected a 4.3% decrease in adjusted non-interest income to $468 million, partially offset by a 2.0% increase in net-interest income to $824 million. Similar to most banks, Regions mortgage income declined (down 24.6% sequentially), due to lower levels of refinancings during the quarter. Partially offsetting this headwind, service charges on deposits were up 5.9% sequentially.

Improved QoQ net interest income reflected an eight basis point widening of net interest margin (NIM) to 3.24%, partially offset by a 1.3% decrease in average earning assets. The wider NIM was mostly attributable to the positive impact of the Company’s 2Q13 capital efficiency/funding cost reduction, and investment portfolio actions. Meanwhile Regions reported sustained average loan growth, up 1.1% in 3Q13, led by a 3.6% increase in average commercial & industrial loans, a 7.8% increase in average indirect auto loans, and a 15.3% increase in average commercial investor real estate construction exposure.

During 3Q13, the Company’s asset quality continued to improve. At September 30, 2013, Regions reported non-performing assets (NPAs) of $1.5 billion, down 8.9% sequentially. NPAs as a percent of loans plus OREO were still a relatively high 2.03% at the end of 3Q13, but down from 2.25% at the end of 2Q13. Meanwhile, net charge-offs (NCO) declined 20.8%, sequentially, to $114 million and represented a moderate 0.60% of average loans, from 0.77% for 2Q13. Positively and perhaps signaling sustained future credit quality improvement, criticized and classified loans declined QoQ.

Although NCOs outpaced provisions by $96 million, Regions’ loan loss reserve of $1.54 billion continues to provide ample protection, in DBRS’s view. At the end of 3Q13, the allowance represented 2.03% of total loans and covered 114% of non-performing loans (excluding loans held for sale).

Regions’ capital position remains sound, and its gross loan-to-deposit ratio of 82% underpins its solid liquidity and funding profile. Despite the approximately $350 million of common stock buybacks through the nine months of the year ended September 30, 2013, capital metrics remain comfortably above regulatory minimums. At September 30, 2013, Regions’ estimated risk weighted capital ratios included a Tier 1 Common ratio of 11.1%, Tier 1 ratio of 11.6% and Total ratio of 14.6%. In regards to Basel III, Regions estimates its Tier 1 Common ratio to be 10.4%, which is well above the minimum.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]