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.
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).
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,
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.
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
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
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
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