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 long-term ratings at the Company and all ratings at the Bank have been changed to Positive from 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
Regions’ ratings and Positive trend reflect its diversified and strong banking franchise, which includes a retail banking presence in 15 states, along with other businesses with a broader geographic reach. Regions has been investing in its business with bolt on acquisitions gaining additional fee revenue and asset generation capabilities. 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 ongoing impact of lower interest rates and high levels of liquidity on the net interest margin and the expectation that asset quality is likely at an unsustainably low level and may modestly deteriorate. 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.
The continuation of recent trends including a strong earnings performance, while maintaining a similar risk profile, would result in an upgrade of the ratings. Conversely, a sustained weakening of profitability metrics, or a higher than expected increase in credit losses, would result in a downgrade of ratings.
Franchise Combined Building Block (BB) Assessment: Strong/Good
Regions is a diversified provider of consumer and commercial banking, wealth management, and mortgage products and services. Regions is the 17th largest banking company in the U.S. by deposits, with operations in the South, Midwest and Texas as well as some businesses with a greater geographic scope.
Earnings Combined Building Block (BB) Assessment: Strong/Good
Regions’ earnings power has improved as initiatives to grow and diversify revenues, as well as control expenses, have shown results. Additionally, Regions’ hedging program has helped to stabilize the net interest margin. The Company’s results in 2021 have been boosted by reserve releases. However, the Company has shown growth in pre-provision income and has reported positive operating leverage for 9M21. Regions reported net income of $2.1 billion for 9M21, equating to a ROAA of 1.82%, up substantially from the $478 million and 0.47% ROAA earned 9M20.
Risk Combined Building Block (BB) Assessment: Strong/Good
Regions’ overall risk profile remains sound. DBRS Morningstar views the risk profile as significantly improved compared to pre-financial crisis levels, when it held a significantly larger percentage of its loan portfolio in CRE loans. However, asset quality metrics are expected to worsen from their current unsustainably low levels.
Funding and Liquidity Combined Building Block (BB) Assessment: Strong
Regions’ funding position is considered strong, reflecting its low-cost deposit franchise and liquid balance sheet. Regions has strong levels of core deposits, including 43% of deposits that are non-interest bearing, leading to one of the lowest cost of funds in the industry.
Capitalization Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar views Regions’ capitalization levels as solid. The Company generates significant capital and has deployed some for bolt-on acquisition as well as stock buybacks. Regulatory capital ratios, including the CET1 ratio of 10.8% as of September 30, 2021, are expected decline from their current levels. The Company targets a CET1 operating range of 9.25% to 9.75% and expects to get to the midpoint of the range by YE21.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/388555
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in U.S. dollar unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (July 19, 2021): https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations.
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
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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