CHICAGO--(BUSINESS WIRE)--Fitch Ratings has upgraded Regions Financial Corporation's (RF) ratings to 'BBB' from 'BBB-' and revised the Rating Outlook to Stable from Positive. The upgrade was supported by asset quality improvement, a strong capital profile, and a generally recovering overall risk profile.
The rating action follows a periodic review of the large regional banking group, which includes BB&T Corporation (BBT), Capital One Financial Corporation (COF), Comerica Incorporated (CMA), Fifth Third Bancorp (FITB), Huntington Bancshares Inc. (HBAN), Keycorp (KEY), M&T Bank Corporation (MTB), MUFG Americas Holdings Corporation (MUFG), PNC Financial Services Group, Inc. (PNC), Regions Financial Corporation (RF), SunTrust Banks Inc. (STI), US Bancorp (USB), Wells Fargo & Company (WFC), and Zions Bancorporation (ZION).
Company-specific rating rationales for the other banks are published separately, and for further discussion of the large regional bank sector in general, refer to the special report titled 'Large Regional Bank Periodic Review,' to be published shortly.
KEY RATING DRIVERS - IDR, VR and Senior
Fitch upgraded RF's ratings to 'BBB' from 'BBB-' and revised the Outlook to Stable from Positive. The upgrade was supported by asset quality improvement, a strong capital profile, and a generally recovering overall risk profile. RF's ratings remain relatively low as compared to its peer group despite the upgrade. The upgrade and Stable Outlook incorporate Fitch's expectations of an improving earnings profile over time.
RF has reported meaningful asset quality improvement over the past 12 months with non-performing assets, inclusive of accruing troubled debt restructurings, falling from almost 6% to roughly 3% at June 30, 2014. This has been accomplished through loan sales, and improving borrower performance. Similarly net charge-offs (NCOs) have fallen significantly from crisis levels. While Fitch does not expect the low level of NCOs in 2Q'14 to be sustainable, RF has still reported meaningful asset quality improvement over the past couple years.
The upgrade of RF's ratings also reflects the bank's strong capital profile. RF reports the second highest estimated Tier 1 common ratio (under Basel III) among the Large Regional Bank Peer Group. RF's estimated Common Equity Tier 1 ratio on a fully phased-in basis under Basel III was approximately 11% at June 30, 2014, well above the 7% requirement (absent any D-SIB buffer). Fitch expects that RF will attempt to distribute some of this excess capital to shareholders; however, these distributions will be constrained by regulatory stress testing, and as such, RF's capital ratios will likely stay elevated over the near term.
In addition to a solid capital profile, RF's ratings and Outlook reflect a good liquidity position. In addition to having one of the lowest loan-to-deposit ratios, RF's has a very low reliance on wholesale funding and a high level of liquid assets. Further, over the past 10 quarters, RF has meaningfully grown capital in excess of balance sheet growth.
Offsetting these strengths, RF's ratings are constrained by a relatively weaker earnings profile. While reported results are roughly in line with peer averages, Fitch notes that much of the earnings performance reflects large reserve releases. RF reported just $37 million in provision expenses in 1H'14, as compared to $149 million in NCOs. Fitch expects the level of reserve releases to continue to diminish, which may ultimately pressure earnings as RF provides for new loan growth.
RATING SENSITIVITIES - IDR, VR AND SENIOR
Ratings could be positively affected by further improvement in core earnings combined with the maintenance of capital at above peer levels. Over the past four quarters, RF's return on assets on average has improved materially as opposed to the prior couple years, and RF has been one of the few banks to report some stability or even improvement in its net interest margin as higher cost time deposits have rolled off. Fitch views further upward momentum in RF's ratings over the long-term given the strength of its franchise, de-risking of balance sheet the financial crisis, and various improvements made in its risk management program.
Conversely, a sustained reversal of moderating credit trends, combined with a large decrease in capital, would likely pressure ratings; although a downgrade is viewed as less likely given RF's recent progress in addressing many of its many challenges.
RF has reported significant automobile lending growth over the past year, with auto loan balances increasing 29% from June 30, 2013. While this asset class still only represents 4% of total loans, this growth, combined with a pretty big drop in auto yields relative to peers, warrants monitoring given the competitive dynamics of the market, and the significant growth. RF had re-entered the indirect auto lending market in October 2010, after having exited it in October 2008. Indications of excessive risk taking or material weakening in credit quality could apply downward ratings pressure.
When RF sold Morgan Keegan (MK) to Raymond James in 2012, RF agreed to indemnify Raymond James for all litigation matters related to pre-closing activities. The carrying amount of the indemnification obligation at June 30, 2014 totaled $224 million. There is very limited visibility into the ultimate outcome of this or other pending litigation facing RF, and Fitch's ratings of RF do not currently incorporate a charge in excess of what the indemnification obligation covers. A charge in excess that meaningful erodes RF's capital profile could apply negative ratings pressure.
Fitch also notes that similar to some of its peers, RF is attempting to grow its capital markets and investment banking activities once again. Given its past issues with MK, Fitch will monitor its growth and product offerings for any rating implications.
KEY RATING DRIVERS - HOLDING COMPANY
RF's Issuer Default Rating (IDR) and Viability Rating (VR) are equalized with those of its operating companies and banks, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary default probabilities.
RATING SENSITIVITIES - HOLDING COMPANY
Should RF's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies. This is viewed as unlikely though for RF given the strength of the holding company liquidity profile.
Fitch is now considering introducing a rating differential between the holding company and bank in the U.S. due to structural changes in the sector and the evolving regulatory landscape, as described in the special report 'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles', dated March 27, 2014. Given Fitch's views that RF may not receive a long-term debt requirement, its ratings may not be impacted as a result of Fitch's evolving review regarding notching.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
RF has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, RF is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support.
RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
RF's Support Rating and Support Rating Floor are sensitive to Fitch's assumption around capacity to procure extraordinary support in case of need.
KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by RF and by various issuing vehicles are all notched down from RF or its bank subsidiaries' VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles.
RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings of subordinated debt and other hybrid capital issued by RF and its subsidiaries are primarily sensitive to any change in RF's VR.
KEY RATING DRIVERS - LONG- AND SHORT-TERM DEPOSIT RATINGS
RF's uninsured deposit ratings are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.
KEY RATING SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS
The ratings of long- and short-term deposits issued by RF and its subsidiaries are primarily sensitive to any change in RF's long- and short-term IDRs.
Fitch has taken the following ratings actions:
Regions Financial Corporation
--Long-term IDR upgraded to 'BBB' from 'BBB-'; Outlook Stable
--Senior debt upgraded to 'BBB' from 'BBB-';
--Short-term IDR upgraded to 'F2' from 'F3';
--Subordinated debt upgraded to 'BBB-' from 'BB+';
--Viability rating upgraded to 'bbb' from 'bbb-';
--Preferred stock upgraded to 'B+' from 'B';
--Support affirmed at '5';
--Support floor affirmed at 'NF'.
Regions Bank
--Long-term IDR upgraded to 'BBB' from 'BBB-'; Outlook Stable;
--Long-term deposits upgraded to 'BBB+' from 'BBB';
--Short-term deposits affirmed at 'F2';
--Short-term IDR upgraded to 'F2' from 'F3';
--Senior debt upgraded to 'BBB' from 'BBB-';
--Subordinated debt upgraded to 'BBB-' from 'BB+';
--Viability rating upgraded to 'bbb' from 'bbb-';
--Support affirmed at '5';
--Support floor affirmed at 'NF'.
AmSouth Bank
AmSouth Bancorporation
--Subordinated debt upgraded to 'BBB-' from 'BB+'.
Additional information is available on www.fitchratings.com.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);
--'Assessing and Rating Bank Subordinated and Hybrid Securities Criteria' (Jan. 31, 2014);
--'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles' (March 27, 2014);
--'U.S. Banking Quarterly Comment: 2Q14' (July 23, 2014);
--'Index Trend Analysis - 2Q14 (Fitch Fundamentals Index Falls to Neutral)' (July 15, 2014);
--'Risk Radar Global 3Q14' (Sept. 15, 2014).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397
Rating FI Subsidiaries and Holding Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209
Assessing and Rating Bank Subordinated and Hybrid Securities Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137
U.S. Bank HoldCos & OpCos: Evolving Risk Profiles
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742096
U.S. Banking Quarterly Comment: 2Q14 (Environment Constraining Earnings)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753107
Index Trend Analysis ￢ﾀﾓ 2Q14 (Fitch Fundamentals Index Falls To Neutral)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752428
Risk Radar Global 3Q14
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=773568
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=891934
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