DBRS Upgrades Regions Financial Corporation to A (low); Trend Stable

DBRS, Inc. (DBRS) upgraded the ratings of Regions Financial Corporation (Regions or the Company), including the Company’s Long-Term Issuer Rating, to A (low) from BBB (high). At the same time, DBRS upgraded the long-term ratings of its primary banking subsidiary, Regions Bank (the Bank). The trend for all ratings is now Stable. The Intrinsic Assessment (IA) for the Bank has been raised to ‘A’, while the 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 upgrade of most ratings reflects the ongoing progress the Company has made in improving its credit fundamentals, including stronger financial results, more rigorous risk management, and improved asset quality. Regions overhauled its risk culture following the financial crisis, including reducing its concentrations in certain loans and improving the overall risk profile. DBRS expects that this reduction in risk will lead to an improved performance in asset quality during the next downturn. Notably, 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 3Q18. Additionally, the Company’s initiatives to grow and diversify revenue, while controlling expenses, have driven an improvement in operating results.

RATING DRIVERS
A sustained better than peer financial performance, including the consistent generation of positive operating leverage, while maintaining sound asset quality and balance sheet fundamentals, could lead to positive rating actions. 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 or weak underwriting, could have negative rating implications.

RATING RATIONALE
DBRS views profitability and efficiency ratio improvements at the Company positively, with the expectation that they will continue. Additionally, reduced exposures to certain asset classes deemed riskier, or not delivering appropriate risk-adjusted returns, have positioned the Company to likely perform better in the next downturn. Higher short-term interest rates have boosted the net interest margin and net interest income. Further, the Company’s deposit mix has performed favorably compared to many other regional bank peers, with a relatively low deposit beta to date. However, deposit betas will likely increase with subsequent rate increases, or if loan growth accelerates. Regions has ongoing investments intended to generate future growth, including building out its capital markets business.

Regions’ ratings also reflect its well-established regional banking franchise, along with its strong deposit funding profile, including a large percentage of non-interest-bearing deposits and solid 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, Regions’ 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 88%, at September 30, 2018, 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, 2018, Regions’ Basel III Tier 1 Common Capital Ratio (CET1) was 10.2%, above the regulatory requirement and peer averages. DBRS expects that Regions will maintain capital levels moderately lower from current levels and in line with peer averages.

Birmingham, Alabama-based Regions Financial Corporation, reported $124.6 billion in assets as of September 30, 2018.

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.

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

The applicable methodology is Global Methodology for Rating Banks and Banking Organisations (July 2018), 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
Last Rating Date: 13 November 2017

The rated entity or its related entities did participate in the rating process for this rating action. DBRS 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.