TEXT-S&P raises Regions Financial ratings to 'BBB-/A-3'

Thu Mar 15, 2012 3:09pm EDT

March 15 - Overview	
     -- Regions Financial announced this week that it planned to redeem $3.5 	
billion in cumulative perpetual preferred shares and that it had priced a 	
common stock offering of approximately $900 million.	
     -- As a result, we've raised our assessment of the bank's capital and 	
earnings to "adequate" from "moderate."	
     -- We are raising our ratings on Regions Financial to 'BBB-/A-3' from 	
'BB+/B' and our ratings on Regions Bank to 'BBB/A-2' from 'BBB-/A-3'.	
     -- The outlook is stable, reflecting our expectation that the company 	
will remain profitable in 2012 and 2013, aided by additional loan-loss reserve 	
releases amid a gradual improvement in asset quality.	
	
Rating Action	
On March 15, 2012, Standard & Poor's Ratings Services raised its long- and 	
short-term issuer credit ratings on Regions Financial Corp. (Regions) to 	
'BBB-/A-3' from 'BB+/B'. We also raised our ratings on Regions' primary bank 	
subsidiary, Regions Bank, to 'BBB/A-2' from 'BBB-/A-3'. The outlook on the 	
long-term ratings on both entities is stable. In addition, we raised the 	
rating on the preferred shares to 'BB' from 'B+', in accordance with our 	
revised bank hybrid capital criteria (see "Bank Hybrid Capital Methodology And 	
Assumptions," published Nov. 1, 2011).	
	
Rationale	
Regions Financial announced this week that it planned to redeem $3.5 billion 	
in Series A cumulative perpetual preferred shares issued to the U.S. Treasury 	
under the Troubled Asset Relief Program's (TARP) Capital Purchase Program and 	
that it had priced a common stock offering of approximately $900 million. In 	
addition, Regions announced that the Federal Reserve has completed its review 	
of the company's capital plan and informed the company that it had no 	
objections to the capital actions set forth in its plan.	
	
The upgrade primarily reflects our view that Regions' capital and earnings 	
have improved. As a result, we raised the bank's stand-alone credit profile 	
(SACP) to 'bbb' from 'bbb-'. We estimate that the issuance of common shares, 	
coupled with the previously announced sale of its wholly owned Morgan Keegan 	
brokerage subsidiary, will increase common equity by nearly $1.0 billion. As a 	
result, our assessment of the bank's capital and earnings has risen to 	
"adequate" from "moderate" (as our criteria define the terms), largely based 	
on higher projected capital levels. Specifically, we now project that Regions' 	
risk-adjusted capital (RAC) ratio before diversification will rise to roughly 	
8.4% by the end of 2012. (For details on our RAC ratio before diversification, 	
see "Banks: Bank Capital Methodology And Assumptions.") This projected RAC 	
ratio is solidly within the 7%-10% range that we deem as "adequate" under our 	
revised bank criteria and is comparable to most other U.S. large regional 	
banks'. (See "Banks: Rating Methodology And Assumptions," published Nov. 9, 	
2011.)	
	
We expect that Regions will remain firmly profitable over the next two years. 	
We think loan-loss provisions could decline gradually, and we expect continued 	
loan-loss reserve releases due to slowly improving asset quality. We estimate 	
that the planned redemption of preferred shares will eliminate about $175 	
million per year in preferred dividends, which would aid earnings retention. 	
However, this will be partially offset by the loss of projected earnings from 	
the sale of Morgan Keegan. Moreover, the company fared adequately in our 	
credit stress testing, based on our higher projected capital levels. We view 	
earnings capacity as adequate. However, the company still faces some risks 	
related to its asset quality given its substantial commercial real estate 	
(CRE) exposures and geographic concentrations in the southeast.	
	
Our assessments of Regions' "funding" as "average" and its "liquidity" as 	
"adequate" have not changed. In terms of funding, the company's ratio of total 	
loans to customer deposits was about 101% in third-quarter 2011, by our 	
calculation. This is comparable with many other large regional banks' and has 	
improved in recent years as a result of rising customer deposits (despite 	
branch closures) and declining loan balances. We do not expect the bank's 	
liquidity to change materially. The securities portfolio totaled roughly $25 	
billion as of Dec. 31, 2011 (nearly 20% of total assets), and consists almost 	
entirely of available-for-sale securities.	
	
However, the parent company's liquidity likely will decline in 2012 given the 	
$3.5 billion redemption of preferred shares and the substantial near-term debt 	
maturities (including $600 million in May 2012, $350 million in June 2012, and 	
$249 million in April 2013). We estimate that cash and deposits at the parent 	
could drop to slightly above $1 billion in the next two quarters from more 	
than $2.5 billion as of Dec. 31, 2011. However, we think the parent company's 	
cash and deposit balances could rise thereafter because of potential dividends 	
from bank subsidiaries or due to potential debt issuance. 	
	
Along with capital and earnings and funding and liquidity, we also base our 	
assessment of Regions' SACP on our view of the bank's adequate business 	
position and moderate risk position. Our view of the bank's risk position 	
reflects its still weak loan quality and large CRE loan exposures, which 	
partially offset the strengths. Our issuer credit rating on Regions does not 	
incorporate the potential for extraordinary government support.	
	
Outlook	
The stable outlook reflects our expectations that Regions will remain 	
profitable and that loan performance could improve somewhat further in 2012 	
and 2013. As such, it is unlikely that we would raise the ratings again within 	
the next two years given that our assessments of the company's business 	
position, capital and earnings, funding, and liquidity are not likely to 	
improve. However, if asset quality strengthens more than we currently expect, 	
then we could raise the long-term rating. Conversely, we could lower the 	
ratings if asset quality or liquidity deteriorates meaningfully, or if the 	
company does not remain firmly profitable as we expect. More specifically, we 	
could lower the rating if nonperforming assets, by our calculation, rise 	
materially from current levels, or if cash and deposits at the parent holding 	
company fall substantially below $1 billion.	
	
Ratings Score Snapshot	
                               To                         From	
Issuer Credit Rating           BBB/Stable/A-2             BBB-/Stable/A-3	
Bank Holding Company Rating    BBB-/Stable/A-3            BB+/Stable/B	
	
SACP                           bbb                        bbb-	
 Anchor                        bbb+                       bbb+	
 Business Position             Adequate (0)               Adequate (0)	
 Capital and Earnings          Adequate (0)               Moderate (-1)	
 Risk Position                 Moderate (-1)              Moderate (-1)	
 Funding and Liquidity         Average                    Average 	
                               and adequate (0)           and adequate (0)	
	
Support                        0                          0	
 GRE Support                   0                          0	
 Group Support                 0                          0	
 Sovereign Support             0                          0	
	
Additional Factors             0                          0	
	
Related Criteria And Research	
     -- Industry Report Card: Asset Quality Improvement Slowed In 	
Fourth-Quarter For Large U.S. Regional Banks, Feb. 15, 2012	
     -- EARNINGS UPDATE: Regions Financial Corp. Ratings Unaffected By 	
Fourth-Quarter Results, Jan. 25, 2012	
     -- Regions Financial Corp., Jan. 9, 2012	
     -- Regions Financial Corp. And Subsidiary Ratings Affirmed; Outlook Is 	
Stable, Dec. 6, 2011	
     -- Banks: Rating Methodology And Assumptions, Nov. 9, 2011	
     -- Banking Industry Country Risk Assessment Methodology And Assumptions, 	
Nov. 9, 2011	
     -- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011	
     -- Commercial Real Estate Remains A Problem For U.S. Banks, But The Worst 	
Could Be Over, March 28, 2011	
     -- Bank Capital Methodology And Assumptions, Dec. 6, 2010	
	
Ratings List	
	
Upgraded	
                                        To                 From	
Regions Financial Corp.	
 Counterparty Credit Rating             BBB-/Stable/A-3    BB+/Stable/B	
 Senior Unsecured                       BBB-               BB+	
 Subordinated                           BB+                BB	
 Commercial Paper                       A-3                B	
	
Regions Bank	
 Counterparty Credit Rating             BBB/Stable/A-2     BBB-/Stable/A-3	
 Certificate Of Deposit	
  Local Currency                        BBB/A-2            BBB-/A-3	
 Subordinated                           BBB-               BB+	
	
Regions Financing Trust II	
 Junior Subordinated                    BB                 B+	
	
Regions Asset Management Co. Inc.	
Regions Financing Trust III	
Union Planters Preferred Funding Corp.	
 Preferred Stock                        BB                 B+	
	
Complete ratings information is available to subscribers of RatingsDirect on 	
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 	
by this rating action can be found on Standard & Poor's public Web site at 	
www.standardandpoors.com. Use the Ratings search box located in the left 	
column.