DBRS, Inc. (DBRS Morningstar) upgraded the ratings of Regions Financial Corporation (Regions or the Company), including the Company’s Long-Term Issuer Rating to ‘A’ from A (low). At the same time, DBRS Morningstar upgraded the ratings of its primary banking subsidiary, Regions Bank (the Bank) including its Long-Term issuer Rating to A (high). The trend for all ratings at the Company and the Bank are now Stable. The Intrinsic Assessment (IA) for the Bank is A (high), 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
The ratings upgrade reflects Regions’ strong pre-provision profitability levels and improved risk management practices. Additionally, Regions operates a 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 franchise with bolt on acquisitions gaining additional fee revenue and asset generation capabilities. The ratings are also supported by Regions’ strong balance sheet, including ample low-cost core deposit funding, as well as sound capital levels.
The ratings and Stable trend also consider the weakening economic outlook and the expectation that asset quality remains at an unsustainably low level and may modestly deteriorate. However, we view Regions as better positioned to manage through down economic cycles given its mix of businesses and previous steps it had taken to reduce its risk profile and hedge its balance sheet.
Given the recent ratings upgrade, an additional ratings improvement is unlikely. Over the longer-term, further strengthening of the franchise, while achieving top tier operating earnings performance with 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.
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 18th 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 2022 have been boosted by higher interest rates. Additionally, the Company has shown growth in pre-provision income. Regions reported net income of $1.6 billion for 9M22 and record earnings before provision and taxes for 3Q22.
Risk Combined Building Block (BB) Assessment: Strong
Regions’ overall risk profile remains sound. DBRS Morningstar views the risk profile as much 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: Very Strong/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, resulting in one of the lowest cost of funds in the industry.
Capitalization Combined Building Block (BB) Assessment: Good
DBRS Morningstar views Regions’ capitalization levels as solid. The Company generates significant capital and has deployed some for bolt-on acquisitions, as well as stock buybacks. Regulatory capital ratios, including the CET1 ratio of 9.3% as of September 30, 2022, are expected to increase from their current levels. The Company targets a CET1 operating range of 9.25% to 9.75% and expects to manage towards the mid to upper end of the range over time.
Further details on the Scorecard Indicators and Building Block Assessments can be found at ADD LINK
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis.
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
Notes: All figures are in U.S. dollar unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organizations https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations (June 23, 2022). In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.
The primary sources of information used for this rating include Morningstar Inc. and Company Documents. 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.
The conditions that lead to the assignment of a Negative or Positive trend are generally 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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