DBRS Upgrades Regions Financial Corporation to BBB (high); Stable Trend

DBRS, Inc. (DBRS) has today upgraded the ratings for Regions Financial Corporation (Regions or the Company), including its Issuer & Senior Debt rating to BBB (high) from BBB. The trend for all ratings is Stable. The rating action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

The upgrade reflects the progress the Company has made improving its asset quality and reducing its risk profile, while improving core profitability. Specifically, 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 3Q16. Additionally, initiatives implemented by Regions to grow and diversify revenue, while controlling expenses, have begun to, and will continue to, in DBRS’s opinion, drive continued improvements in operating results.

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 15 states from Texas to the Midwest. The Company maintains solid deposit market shares in a number of states and MSAs, including the number one ranking in its home state of Alabama and neighboring Mississippi, number two ranking in Tennessee and a number six ranking in Florida. Additionally, the Company’s earnings are diversified with a solid level of non-interest income garnered from a variety of sources.

While Regions’ profitability and efficiency ratios have improved, the ratings also consider the need for Regions to continue to focus on becoming a more efficient bank. With this in mind, 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 and insurance businesses while building back its capital markets business, 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.

Since the financial crisis, Regions has revamped its risk management practices. While asset quality ratios are still modestly lagging similarly-sized regional banks, Regions’ asset quality remains sound, although it has been modestly impacted by the downturn in the energy sector. Specifically, non-performing assets as a percent of loans plus OREO (excluding performing restructured loans) represented a manageable 1.47% at September 30, 2016, as compared to 1.13% at YE15. Meanwhile, 9M16 net charge-offs were low, representing 0.32% of average loans, up just two basis points from full year 2015. DBRS notes that the Company also has indirect exposure to the energy industry, specifically to geographies likely to be affected by a slowdown in this sector. Nonetheless, DBRS anticipates that these exposures will remain manageable.

Overall, Regions’ funding and capital profiles remain ample. Funding is underpinned by a solid loan to deposit ratio of 81%, at September 30, 2016, providing additional support for loan growth, as well as Basel III liquidity requirements. Additionally, liquidity is solid and the Company expects to be compliant with the fully phased-in modified LCR requirement of 100%, by the January 1, 2017 deadline, without material changes to the balance sheet. Meanwhile, DBRS views the Company’s capital position as solid. Indeed, at September 30, 2016, Regions’ Basel III Tier 1 Common Capital Ratio (CET1) was 11.16%, amply above the regulatory requirement. DBRS expects that Regions will deploy capital over time to levels more in line with peer averages.

Regions Financial Corporation, a financial holding company headquartered in Birmingham, Alabama, reported $125.2 billion in assets as of September 30, 2016.

RATING DRIVERS
A further strengthening of financial performance, including the sustained generation of positive operating leverage, while maintaining sound asset quality and balance sheet fundamentals could lead to further positive rating action. Conversely, a reversion to weaker profitability metrics, or an increase in credit losses that exceed normalized levels; especially should they result from an increase in Regions’ risk appetite, could have negative rating implications.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (July 2016), DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2016) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: John Mackerey
Rating Committee Chair: Michael Driscoll
Initial Rating Date: 5 July 2006
Most Recent Rating Update: 18 December 2015

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.