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
Region’s ratings and Stable trend reflect its diversified and strong banking franchise, which includes a retail banking presence in 15 states, along with other businesses that operate over a larger geographic area. The ratings are also supported by Region’s strong balance sheet, including ample low-cost core deposit funding, as well as sound capital levels. The Company’s strong pre-provision profitability, which includes a solid level of non-interest income is also factored into the ratings

The ratings also consider the economic disruption caused by the Coronavirus Disease (COVID-19) pandemic, as well as the impact of lower interest rates and the resulting adverse effect on asset quality. However, we view Regions as able to manage through this period given its mix of businesses and steps it had previously taken to reduce its risk profile and hedge its balance sheet. Additionally, support measures including monetary and fiscal stimulus, as well as relaxed criteria from regulators, should also mitigate some of the negative impact of the crisis. However, should the crisis be prolonged, or if the recovery is muted, negative ratings pressure is likely.

RATING DRIVERS
Given the current operating environment, DBRS Morningstar does not see upward ratings pressure over the intermediate term. Over the longer term, a sustained better-than-peer earnings performance, while maintaining a similar risk profile, would result in an upgrade of the ratings. Conversely, a sustained weakening of profitability metrics, or an outsized increase in credit losses, would result in a ratings downgrade.

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’ financial performance has been fairly resilient, despite the highly adverse operating environment. While earnings have been negatively impacted by reserve building during the first half of the year, revenues were higher driven by volume growth and a good performance from Regions’ varied sources of non-interest income. In 3Q20, Regions reported $530 million in net income, equating to a robust ROA of 1.48%. Regions’ strong pre-provision results have been driven in part by a sound hedging program and a low-cost deposit base. Further, Regions has kept a tight control on expenses, while making ongoing investments intended to generate future growth, including targeting select markets for growth and building out its capital markets business.

Asset quality remains solid, with non-performing assets still low and net charge-offs at highly manageable levels. We expect that asset quality will likely worsen from this point, although stimulus measures and forbearance will slow loss recognition. Most recently, net charge-offs were 0.50% of average loans for 3Q20, but this is likely to deteriorate in 2021, albeit to still manageable levels. Additionally, improvements to Regions’ risk management process, including strengthened risk management practices, a more diversified loan portfolio and a reduction in the level of commercial real estate and construction loans, should lead to a better performance during this downturn versus the financial crisis.

Regions’ funding and liquidity profile remains sound, underpinned by a strong, low-cost deposit base. Consistent with industry trends, deposit growth has easily outpaced loan growth, but we expect this trend to normalize over time. Meanwhile, capital also remains sound, with a CET1 ratio of 9.3%, despite slipping below 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 build capital towards its targeted range.

Birmingham, Alabama-based Regions Financial Corporation, reported $145.2 billion in assets as of September 30, 2020.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020): https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

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

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