DBRS: Regions’ IBPT Up QoQ on Higher Fee Income and Lower Expenses; Down YoY

Summary:
• 2Q14 earnings to common shareholders of $292 million, down 6.1%, quarter-on-quarter (QoQ), mostly due to an increase in provisions for loan loss reserves off of a very low base, moderating reserve releases.
• On an adjusted basis, Regions’ income before provisions and taxes (IBPT) increased 10.1% linked-quarter, but was down 4.9% year-on-year (YoY).
• DBRS, Inc. rates Regions Financial Corporation Issuer & Senior debt at BBB with a Stable trend.

DBRS, Inc. (DBRS) considers Regions Financial Corporation’s (Regions or the Company) 2Q14 results as relatively sound, despite considerable headwinds, including net interest margin pressure and a still relatively high expense base. On an adjusted basis, the Company’s IBPT increased 10.1%, QoQ, reflecting broad-based improvement in fee income, sound loan growth and lower adjusted expenses. Meanwhile, adjusted IBPT declined 4.9%, YoY, primarily reflecting lower mortgage banking income.

Offsetting net interest margin pressure, average 2Q14 loans increased 1.7% QoQ, and 2.5% YoY, mostly reflecting growth in the commercial & industrial and auto loan portfolios. Importantly, management anticipates that loan growth will be in the 3% to 5% range for the year and expects it to offset the negative impact of expected margin contraction. Meanwhile, future fee income generation will be modestly pressured by the phase-out of the Company’s deposit advance product by YE14.

Expenses remain elevated, with Regions’ efficiency ratio at 64.2%, signaling room for improvement. Positively, the Company continues to focus on driving cost efficiencies through branch consolidations and other initiatives. Overall, management anticipates that full year 2014 adjusted expenses will be less than adjusted 2013 expenses.

Although lagging many of its similarly sized peers, Regions’ asset quality continues to stabilize, reflecting lower levels of non-accrual loans, and net charge-offs.

Despite sustained pressured earnings, DBRS considers the Company’s sequential loan growth (period-end), relatively sound asset quality and solid funding and capital profiles as supportive of its current rating level.

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

Note:
All figures are in U.S. Dollars unless otherwise noted.