DBRS Confirms Regions’ Ratings; Revises Trend to Positive

DBRS, Inc. (DBRS) has today confirmed the ratings for Regions Financial Corporation (Regions or the Company), including its BBB Issuer & Senior Debt rating. At the same time, DBRS has revised the trend for all ratings to Positive from Stable with the exception of Regions Bank’s Short-Term Instruments rating, which remains Stable. These rating actions follow a detailed review of the Company’s operating results, financial fundamentals and future prospects.

Regions’ ratings reflect its geographically diverse, super regional banking franchise, along with its ample funding profile and strong capital position. Focused on the Southeast, Regions’ franchise stretches across 16 states from Texas to the Midwest. The Company maintains solid deposit market shares in a number of states including the number one ranking in its home state of Alabama and neighboring Mississippi, number two ranking in Tennessee and a number five ranking in the large Florida market. Additionally, the Company’s earnings are diversified with a decent level of non-interest income garnered from a variety of sources.

The Positive trend reflects the progress the Company has made improving its asset quality and reducing its risk profile. Since the financial crisis, Regions has de-risked its loan portfolio, strengthened its risk management process and reduced its concentration in commercial real estate and construction loans. Indeed, investor real estate has declined from 24% of the loan portfolio at YE09 to 8% at the end of 3Q15. Additionally, while earnings remain pressured, DBRS anticipates that initiatives being implemented by Regions to grow and diversify revenue, while controlling expenses, have begun to, and will continue to, drive improving operating results. For an upgrade of the ratings, DBRS will look for the Company to achieve sustained earnings improvement including positive operating leverage while maintaining sound asset quality. Conversely, if the Company is unable to deliver a consistent earnings improvement, or there is a perceived increase in risk appetite, DBRS would likely revise the trend back to Stable.

A challenge for the Company, as well as the industry in general, continues to be pressured earnings generation, which remains strained by the low interest rate environment and modest loan demand. Additionally, the benefit from reserve releases has begun to wane as provisioning needs has increased with loan growth. The Company has balanced making investments to generate future growth with the need to reduce expenses. 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. DBRS anticipates that these strategies will take time to be fully executed, although it appears based on recent results that the investments are paying off.

As with many banks, Regions’ spread income remains pressured by the low interest rate environment. For 9M15, the Company’s net interest income was up a moderate 0.45%, year-over-year (YoY), driven by an 8 basis point drop in the net interest margin (NIM) to 3.15%, offset by growth in average earning assets including a 4.4% increase in average 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, as well as continued loan growth.

Regions’ 9M15 fee income (excluding discontinued operations), which represented approximately 37% of adjusted total revenues, increased 4.5%, YoY, driven by increases in a number of categories including card and ATM fees, insurance commissions and fees and capital markets fee income. Meanwhile, the Company’s 9M15 efficiency ratio of 65.3% reflects room for improvement in both expenses and revenues to reach the Company’s goal of a sub 60% efficiency ratio.

Although still modestly lagging similarly sized regional banks, Regions’ asset quality remains sound and has improved, YoY. Specifically, non-performing assets as a percent of loans plus OREO (excluding performing restructured loans) represented a manageable 1.14% at September 30, 2015, as compared to 1.28% at YE14. Meanwhile, 9M15 net charge-offs were low, representing 0.27% of average loans, down from 0.40% for 2014. DBRS notes that the Company does have exposure to the energy industry, as well as geographies likely to be affected by a slowdown in this sector. Nonetheless, DBRS anticipates that these exposures and potential increase in problem loans will remain manageable.

Overall, Regions’ funding and capital profiles remain ample. Funding is underpinned by a solid loan to deposit ratio of 83%, at September 30, 2015, providing additional support for loan growth as well as Basel III liquidity requirements. Overall, liquidity is solid. The Company expects to be compliant with the phased in LCR requirement of 90%, by the January 1, 2016 deadline, without material changes to the balance sheet. Meanwhile, DBRS views the Company’s capital position as solid. Indeed, at September 30, 2015, Regions’ Basel III Common Equity ratio was 10.98%, comfortably above the minimum requirement.

Regions Financial Corporation, a financial holding company headquartered in Birmingham, Alabama, reported $124.8 billion in assets as of September 30, 2015.

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 (December 2015). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (December 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). 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: John Mackerey
Rating Committee Chair: William Schwartz
Initial Rating Date: 5 July 2006
Most Recent Rating Update: 18 December 2014

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