DBRS: RF 1Q Core Earnings Up; Net Inc Up On Large 4Q14 Contingent Legal & Regulatory Item Accrual

Summary:
• 1Q15 earnings to common shareholders of $218 million, up 9% from $200 million for 4Q14, yet down 29.0% from 1Q14. Higher QoQ earnings were mostly driven by a sizable decrease in non-interest expense, mostly reflecting the non-recurrence of a 4Q14 $100 million accrual for contingent legal and regulatory items. Meanwhile, lower YoY earnings mostly reflected a 1Q14 $35 million gain on the sale of TDRs held-for-sale.
• Regions’ adjusted income before provisions and taxes (IBPT; DBRS’ core income metric excluding non-core items) was up 3.6%, QoQ, due to a moderate decrease in adjusted expenses. Meanwhile, IBPT was up 3.3% on a YoY basis, driven by higher adjusted revenues and lower adjusted expense.
• 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) 1Q15 results as sound. Nonetheless, the Company continues to face earnings headwinds, including the challenging operating environment and a relatively high expense base. Despite the pressured earnings, Regions’ balance sheet fundamentals remain solid, including loan and deposit growth, relatively sound and improving asset quality, and solid funding and capital profiles.

On an adjusted basis, Regions’ 1Q15 core earnings improved 3.6%, QoQ, due to a 2.2% decline in adjusted expenses, reflecting lower professional, legal and regulatory expense, as well as outside services expense. Meanwhile total adjusted revenues were slightly down QoQ, reflecting a modest decrease in spread income, mostly due to two fewer days in the quarter and the impact of low interest rates on new loan yields. Despite a product discontinuation in 4Q14, adjusted fee income was relatively flat QoQ, reflecting improved mortgage income spurred by an increase in refinancing activity and higher valuations from mortgage servicing rights, and an increase in wealth management fees driven by higher levels of insurance commissions, and investment services fees.

DBRS notes that Regions will face an additional headwind in 2H15, when its new transaction 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, and space rationalization. At 1Q15, the Company’s adjusted efficiency ratio stood at a high 64.9% (Company calculated), yet down from 66.1% in the prior quarter.

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 common equity Tier 1 ratio of 11.2% (transitional basis). During 1Q15, Regions repurchased $102 million of its common stock. Finally in March 2015, The Federal Reserve did not object to the Company’s capital plan, which includes increasing the quarterly dividend to $0.06 per common share and the repurchase of up to $875 million in common shares over five quarters.

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.