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.