DBRS Morningstar Confirms Regions Financial Corporation at A (low); Trend Stable

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Regions Financial Corporation (Regions or the Company), including the Company’s Long-Term Issuer Rating of A (low). At the same time, DBRS Morningstar confirmed the ratings of its primary banking subsidiary, Regions Bank (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is ‘A’, while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

KEY RATING CONSIDERATIONS
The ratings confirmation and Stable trend reflect Regions’ solid regional banking franchise with lower than peer funding costs, and improving operating results that have benefited from the Company’s efficiency improvement program. Additionally, in DBRS Morningstar’s view, the Company’s more rigorous approach to risk management has led to an improved overall risk profile. The ratings also consider the length of the current credit cycle, a slowing economy and the expected normalization of credit costs. However, risk and portfolio management changes already implemented should enable Regions to show an improved through-the-cycle performance in asset quality. Notably, Regions has maintained a reduced concentration in investor commercial real estate and construction loans.

RATING DRIVERS
A sustained better-than-peer financial performance, including the continued generation of positive operating leverage that results in appropriate risk-adjusted returns, while maintaining strong balance sheet fundamentals, could lead to positive ratings implications. Conversely, a period of weaker profitability metrics or an increase in credit losses that exceed normalized levels, especially should they result from an increase in Regions’ risk appetite or weak underwriting, could have negative ratings implications.

RATING RATIONALE
Regions’ ratings are underpinned by its well-established regional banking franchise, along with its strong deposit funding profile, including a large percentage of non-interest-bearing deposits. Focused on the Southeast, Regions’ franchise stretches across 15 states from Texas to the Midwest, with the Company maintaining solid deposit market shares in a number of these states and MSAs. Additionally, Regions’ earnings are diversified both geographically, as well as by business line, including a solid level of non-interest income.

Regions has shown solid results in recent periods driven in part by ongoing efforts to improve profitability and operating efficiency. These initiatives include the simplification of processes, including reducing management layers as well as increased usage of technology. Through increased hedging activities, the Company has reduced its asset sensitivity helping to stabilize the net interest margin in a more challenging rate environment. Further, Regions has ongoing investments intended to generate future growth, including targeting select markets for growth and building out its capital markets business.

Evidencing the progress of these initiatives, Regions has generated positive operating leverage in recent years. Most recently for 9M19, Regions reported net income from continuing operations of $1.2 billion, a 3% increase from the same period a year ago. Through 9M19, adjusted revenue has grown by 2%, while expenses declined by 1% resulting in positive operating leverage and an improved efficiency ratio. For the year, the Company expects adjusted revenue growth of 2% with adjusted non-interest expense relatively flat.

Regions’ funding and liquidity profile remains sound, underpinned by a solid loan-to-deposit ratio of 88%, at September 30, 2019, providing additional support for loan growth. DBRS Morningstar notes that liquidity is ample, and the Company is compliant with the LCR requirement. Meanwhile, capital also remains sound despite ongoing capital management activities. Indeed, at September 30, 2019, Regions’ Basel III Tier 1 Common Capital Ratio (CET1) was estimated at 9.6%, in line with the Company’s targeted level of 9.5%. After a few years of significant capital returns to shareholders that brought capital levels down, DBRS Morningstar expects that Regions will maintain capital around this current level.

Birmingham, Alabama-based Regions Financial Corporation, reported $128.1 billion in assets as of September 30, 2019.

The Grid Summary Grades for Regions are as follows: Franchise Strength – Strong; Earnings Power – Strong/Good; Risk Profile – Good; Funding & Liquidity – Strong; Capitalisation – Strong/Good.

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

The applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2019), which can be found on our website under Methodologies & Criteria.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

For more information on this credit or on this industry, visit www.dbrs.com.

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