S&P Raises L-T Rating on Regions Financial (RF) to 'BBB'; S-T to 'A-2'

Standard & Poor's Ratings Services said today that it raised its long-term and short-term issuer credit ratings on Regions Financial (NYSE: RF) (Regions) to 'BBB/A-2' from 'BBB-/A-3'. At the same time, we raised our long-term rating on Regions Bank, its primary banking subsidiary, to 'BBB+' from 'BBB', and affirmed the short-term rating at 'A-2'. The outlooks are stable.

"Our one-notch upgrade recognizes Regions' progress in lowering the risk on its balance sheet," said Standard & Poor's credit analyst Barbara Duberstein. This is reflected in the decline in problem loans (including troubled debt restructurings [TDRs]) as well as the build-up of capital ratios. We expect that nonperforming assets (NPAs) will continue to decrease through 2015, benefiting from the economic recoveries in Regions' Southeast U.S. markets, particularly Florida, Georgia, and Alabama.

With about $119 billion in total assets, Regions is a major U.S. regional bank operating in 16 states in the Southeast U.S. Although Regions, in our view, has been late to recover from the national recession relative to many of its large regional bank peers, the company’s asset quality improved substantially in recent quarters. As of Sept. 30, 2014, the company’s total NPAs (including total TDRs) decreased by about one-third from year-end 2013. In particular, TDRs as of Sept. 30, 2014, declined 47% from the year-ago quarter, partly because of a portfolio sale but also because of substantial re-payments. We estimate that the company’s NPA ratio declined to 3.29% (including total TDRs) as of Sept. 30, 2014, from 4.97% as of year-end 2013 and 6.79% as of year-end 2012, according to our calculation. While the NPA ratio is still slightly high, we anticipate it will decline in 2015, and we believe that loan losses over the next year or so will remain low, even if they may increase slightly from current levels. Regions’ net charge-offs in the first nine months of 2014 were only 0.35%.

Regions’ loan portfolio is reasonably diversified by loan type: 54% commercial and industrial, including owner-occupied commercial real estate (CRE); 9% CRE (including only about 3% construction); 16% residential first mortgage; 14% home equity; 5% indirect auto; and 3% other consumer. Still, we believe the company has a concentration in residential first and second mortgages in Florida, but that concentration has declined and become somewhat less risky, given the improving Florida housing market.

We believe that Regions will manage risks somewhat conservatively over the next couple of years. We anticipate that the company will increase its loans at a moderate (not outsized) pace of 3%-5% in 2014 and 2015, and that the company will continue to enhance its risk management governance and processes. As a result of our expectations about loan performance, we are raising our assessment of Regions’ risk profile to “adequate” from “moderate.”

Our stable outlook on Regions is based on our assumption that the company’s NPAs will continue to decline and that the Southeast U.S. markets it serves will continue their economic recovery. We also expect that earnings generation will be steady and comparable with peers’ over the next two years. We could raise the ratings if we believe management has established a track record of solid competitive positioning, stable operating results, and good risk management. We could also raise the ratings if we anticipate that the company will maintain strong capital ratios, particularly a RAC ratio, by our measure,of more than 10% over a prolonged timeframe. Conversely, we could lower the ratings if the NPA ratio (including total restructured loans) does not decline further or if net charge-offs increase sharply on a sustainable basis.

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