DBRS: Regions’ 3Q NI Down QoQ; Improved Net Interest Income Offset by a Decline in Mtge Banking

Summary:
• Regions reported 3Q15 earnings to common shareholders of $242 million, down 10% from $269 million earned in 2Q15. For the quarter, an uptick in NII was not sufficient to offset a decline in mortgage banking.
• Loan growth, including credit card accounts as well as growth in checking accounts point to some improving momentum for the company.
• 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) 3Q15 results as showing some growth momentum although earnings were down linked quarter. Regions reported earnings to common shareholders of $242 million for the quarter, down 10% from $269 million earned in 2Q15. However, the previous quarter included proceeds of $90 million from an insurance settlement.

Total net interest income increased quarter-on-quarter (QoQ) driven primarily from loan growth and balance sheet hedging strategies partially offset by a three basis point drop in the net interest margin. Meanwhile, noninterest income declined QoQ as lower mortgage revenue, due to a reduced benefit from mortgage servicing rights and related hedge, which more than offset growth in other fee income categories including wealth management, capital markets, card and ATM income.

Adjusted expenses remain high and increased 4% sequentially. However, deposit administrative fees increased $31 million, primarily due to an expense of $23 million related to prior assessments while 2Q15 included a $6.0 million refund from over payment. Absent these fluctuations, expenses increased just 1%, partially reflecting investments in businesses and technology. DBRS notes that Regions remains focused on reducing its non-interest expenses through several initiatives, including branch consolidations, and space rationalization. The efficiency ratio remains in the mid 60% range.

Regions’ asset quality remains sound. Indeed, although the level of non-accrual loans and net charge-offs increased this quarter, both remain at manageable levels. Additionally, criticized and classified loans increased by 10% driven primarily by some weakening of energy related credits. Meanwhile, despite the repurchase of $270 million of its common stock in 3Q15, capital remains strong, as reflected by the Company’s estimated Basel III common equity Tier 1 ratio of 10.7% (fully phased-in basis).

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.