DBRS Confirms Regions Ratings; Upgrades Bank Short Term: Stable Trend

DBRS, Inc. (DBRS) has today confirmed most of the ratings for Regions Financial Corporation (Regions or the Company), including its BBB Issuer & Senior Debt rating. At the same time, DBRS upgraded the Short-Term Instruments rating of Regions Bank, the Company’s banking subsidiary to R-1 (low). 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 confirmation and Stable trend for the ratings reflect Regions’ geographically diverse, appealing, and well-entrenched banking franchise, along with its ample funding and capital profiles. Also considered in the ratings is the Company’s pressured core earnings generation and improving asset quality, which still lags similarly sized regional banks. Meanwhile, the upgrade of Regions Bank’s Short-Term Instruments ratings to R-1 (low) from R-2 (high), reflects sustained progress in improving funding and liquidity over time. Overall, it is DBRS’s view that Regions’ credit fundamentals place it at the upper range of its rating category. 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 implications.

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 state deposit market shares, including number one positions in Alabama and Tennessee, the number two position in Mississippi, and the fourth and fifth leading deposit shares in Louisiana and Florida, respectively.

A challenge for the Company continues to be its pressured core earnings generation, which remains strained by the low interest rate environment, and tepid loan demand. The Company’s bottom line also reflects adequate fee income contribution, and an improved yet still relatively high expense base. To improve its bottom line, the Company continues to strengthen its wealth, capital markets and insurance businesses, and remains focused on rationalizing its branch distribution network and overall expense base. Furthermore, as with most banks, the Company continues to look to deepen its customer relationships. DBRS anticipates that these strategies will take time to execute. Nonetheless, if successful, their contribution to the bottom line will provide offsets to future revenue headwinds, including the Company’s new posting order for overdrafts, which is expected to be fully implemented in 2H15.

As with many banks, Regions’ spread income remains pressured by the low interest rate environment. For 9M14, the Company’s net interest income was up a moderate 1.2%, YoY, driven by a 5 bps widening of the net interest margin (NIM) to 3.23%, and a 1.3% increase in average loans. The higher margin reflected the Company’s improved equity position along with a decline in total interest bearing liabilities. Meanwhile, Regions’ loan growth was mostly attributable to higher levels of commercial and industrial loans, indirect auto exposures, and commercial investor real estate construction loans. DBRS notes that future spread income should benefit from the eventual rise in interest rates, especially given the Company’s moderately asset sensitive position.

On an adjusted basis, excluding gains/losses related to securities, leases, and the divestiture of a non-core portion of a wealth management business, Regions’ 9M14 fee income, which represented 35% of total revenues, declined 6.6%, YoY, driven by lower levels of mortgage income and deposit service charges. Meanwhile, the Company’s 9M14 DBRS calculated adjusted efficiency ratio of 65.5% reflects room for improvement in both expenses and revenues.

Although still lagging similarly sized regional banks, Regions’ asset quality remains sound and improved, YoY. Specifically, non-performing assets as a percent of loans plus OREO represented a manageable 1.30% at September 30, 2014, as compared to 2.03%, at September 30, 2013. Meanwhile, 3Q14 net charge-offs were low, representing 0.39% of average loans, down from 0.60% for 3Q13. Although there could be volatility in future credit metrics, this will be somewhat moderated by the Company’s fairly granular loan portfolio. Going forward, DBRS anticipates sustained asset quality improvement, especially given the 15% YoY decrease in criticized and classified loans.

Overall, Regions’ funding and capital profiles remain ample. Funding is underpinned by a solid core deposit base that represented 117% of net loans (DBRS calculated), at September 30, 2014, providing additional support for loan growth. During 9M14, deposits grew 1.8%, led by a 4.3% increase in non-interest bearing deposits. Overall, liquidity is solid, and the Company expects to be fully LCR compliant by the January 2016 deadline, without material changes to the balance sheet. Meanwhile, DBRS views the Company’s capital position as solid. Indeed, at September 30, 2014, Regions’ fully phased-in Basel III Common Equity ratio was 11.22%, comfortably above the minimum requirement.

Regions Financial Corporation, a financial holding company headquartered in Birmingham, Alabama, reported $119.2 billion in assets at September 30, 2014.

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 (June 2014). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found at: http://www.dbrs.com/about/methodologies

The primary 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.

Lead Analyst: Mark Nolan
Rating Committee Chair: Roger Lister
Initial Rating Date: 5 July 2006
Most Recent Rating Update: December 4, 2013

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