DBRS: RF 4Q Earnings Down On Large Contingent & Regulatory Item Accrual; Core Earnings Down

Summary:
• 4Q14 earnings to common shareholders of $195 million, down 36% from $305 million for 3Q14, mostly due to a $100 million accrual for undisclosed contingent and regulatory items.
• Regions’ DBRS calculated income before provisions and taxes (IBPT) decreased 14% on an adjusted basis, excluding non-core items, linked-quarter, mostly reflecting the non-recurrence of a 3Q14 recovery of expenses related to unfunded lending commitments and lower fee income. Meanwhile, spread income was stable, QoQ, reflecting modest loan growth.
• 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) 4Q14 results as sound. Nonetheless, the Company continues to face considerable earnings headwinds, including sustained net interest margin (NIM) pressure, and a relatively high expense base. Despite the pressured earnings, Regions’ balance sheet fundamentals remain solid, including sequential loan growth, relatively sound and improving asset quality, and solid funding and capital profiles.

On an adjusted basis, Regions’ 4Q14 core earnings declined 14% (excluding the accrual for contingent legal and regulatory items, branch consolidation costs, securities gains/losses, leverage lease terminations, and VISA litigation expense), due mostly to the non-recurrence of a 3Q14 recovery of expenses related to unfunded lending commitments, as well as lower fee income generation, including a 7.7% dip in service charges, due to customer reimbursements and product discontinuation. Meanwhile, 4Q14 spread income was stable, QoQ, as a modest 1.2% increase in average loans was offset by a 1 bps narrowing in NIM to 3.17%.

DBRS notes that Regions will face an additional headwind in 2H15, when its new posting order is fully implemented. Nonetheless, and potentially offsetting, DBRS views favorably the Company’s continuing focus on growing fee income, including customer acquisition and retention, deepening share of customer wallet, and new product creation.

Although elevated, Regions remains focused on reducing its non-interest expenses through several initiatives, including branch consolidations. Nonetheless, with a 4Q14 adjusted efficiency ratio of 67.5% (Company calculated), there is significant room for improvement.

Regions’ asset quality continues to improve, reflecting lower levels of non-performing assets and low net charge-offs. Meanwhile, capital remains strong, as reflected by the Company’s estimated Basel III Tier I Common Equity ratio of 11.1%. During 4Q14, Regions repurchased $248 million of its common stock, as part of its board approved program of $350 million.

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.