DBRS Confirms Regions Financial Corporation at BBB (high); Revises Trend to Positive

DBRS, Inc. (DBRS) confirmed the ratings of Regions Financial Corporation (Regions or the Company), including the Company’s Long-Term Issuer Rating of BBB (high). At the same time, DBRS confirmed the ratings of its primary banking subsidiary, Regions Bank (the Bank). The trend for all ratings at the Company and the long-term ratings at the Bank have been revised to Positive, while the short-term ratings at the Bank remain Stable. The Intrinsic Assessment (IA) for the Bank is A (low), 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.

The ratings confirmation and Positive trend reflect the ongoing progress the Company has made improving its financial results, risk management and asset quality. Following the financial crisis, Regions has overhauled its risk culture including a focus on credit portfolio management, which has served to reduce concentrations and risk in its loan portfolio. DBRS expects this reduction in risk will lead to an improved performance in asset quality during the next downturn. For instance, post-crisis, Regions has reduced its concentration in commercial real estate and construction loans, with investor real estate exposure declining from 24% of the loan portfolio at YE09 to just 7% at the end of 3Q17. The Company has also reduced exposure to the energy sector and other loan categories, such as indirect auto, which it believes are not delivering appropriate risk-adjusted returns. Additionally, initiatives implemented by Regions to grow and diversify revenue, while controlling expenses, have driven an improvement in operating results.

DBRS views current profitability and efficiency ratio trends at the Company positively, with the expectation that they will continue. While reducing certain exposures to certain asset classes deemed more risky, or not delivering appropriate risk-adjusted returns has curtailed loan and revenue growth, Regions’ other initiatives, including managing expenses, have provided an offset. Additionally, higher interest rates should help to boost the net interest margin and net interest income, especially given the Company’s deposit mix, which is comprised of a large percentage of non-interest bearing deposits. Additionally, the Company has ongoing investments intended to generate future growth, including building its capital markets business.

Also incorporated into the Company’s ratings is its well-established regional banking franchise, along with its strong deposit funding profile and ample capital position. 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, the Company’s earnings are diversified both geographically, as well as by business line, including a solid level of non-interest income.

Overall, Regions’ funding and capital profiles remain ample. Funding is underpinned by a solid loan to deposit ratio of 81%, at September 30, 2017, providing additional support for loan growth. Meanwhile, liquidity is solid and the Company is compliant with the fully phased-in LCR requirement. Despite ongoing capital management activities, DBRS views the Company’s capital position as solid and providing the Company with flexibility. Indeed, at September 30, 2017, Regions’ Basel III Tier 1 Common Capital Ratio (CET1) was 11.3%, well above the regulatory requirement and peer averages. DBRS expects that Regions will deploy capital over time reaching levels more in line with peer averages.

Birmingham, Alabama-based Regions Financial Corporation, reported $123.3 billion in assets as of September 30, 2017.

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

RATING DRIVERS
A further strengthening of financial performance, including the sustained generation of positive operating leverage and revenues, while maintaining sound asset quality and balance sheet fundamentals could lead to positive rating actions. Conversely, a reversion to weaker profitability metrics, an inability to grow revenues, 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 (May 2017), 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, Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: 5 July 2006
Most Recent Rating Update: 2 August 2017

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.