DBRS: Regions 4Q13 Lower QoQ Earnings; But Positive Operating Leverage Adjusted For Charges

Summary:

• 4Q13 earnings to common shareholders of $219 million down 23.2% from 3Q13, driven by several charges.
• Adjusted revenues increased by 2.1%, while adjusted expenses increased by 0.5%, resulting in positive operating leverage
• DBRS rates Regions Financial Corporation Issuer & Senior debt at BBB with a Stable trend

Regions’ core earnings were moderately improved, QoQ and reflected positive operating leverage adjusted for several large non-core items. DBRS, Inc., (DBRS) considers the Company’s constrained earnings generation, its relatively sound asset quality, which still lags similarly-sized regionals, and solid funding and capital profiles as supportive of its current rating level.

Excluding non-core items, adjusted revenues increased 2.1% QoQ, reflecting an increase in both adjusted fee income and spread income. Higher adjusted non-interest income was mostly attributable to a net gain related to the sale of certain low-income housing investments and an increase in capital markets fee income. Meanwhile, improved spread income reflected average loan growth, especially C&I, indirect and credit card exposures, and a modest widening of the Company’s net interest margin.

During 4Q13, the Company announced that it will consolidate thirty branches in early 2014 as Regions works to increase efficiency. Overall, however, core QoQ expenses were up modestly driven by higher levels of professional/legal costs and salaries/employee benefits expense. Higher salaries and benefits were attributable to an increase in headcount, mostly in customer facing, revenue generating and compliance positions.

Regions’ asset quality remains pressured and still lags that of its similarly sized peers. Importantly, the transfer to HFS and expected sale of $686 million of TDRs should quicken the pace of credit quality improvement. Positively, the Company’s non-performing loans and criticized and classified loans continued to contract. Meanwhile, net charge-offs were up considerably, driven by the sizable mark related to the transfer of the TDRs into the held for sale category. DBRS considers the Company’s post-transfer loan loss reserve level as satisfactory at 1.8% of total loans.

Regions’ funding and capital profiles remain sound. The Company maintains a low loan to deposit ratio of 81%. Moreover, Regions continues to build capital. At December 31, 2013, the Company’s Basel III Tier I common ratio was estimated at 10.5%.

DBRS rates Regions Financial Corporation’s Issuer & Senior debt at BBB with a Stable trend.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]