Fitch Affirms Regions Financial Corporation's IDRs at 'BBB/F2'; Outlook Revised to Positive

CHICAGO--()--Fitch Ratings has affirmed Regions Financial Corporation (RF)'s ratings at 'BBB'/'F2' reflecting the company's good capital and liquidity profile, improving earnings, and continued improvement in asset quality. The Rating Outlook has been revised to Positive from Stable.

The rating action follows a periodic review of the large regional banking group, which includes BB&T Corporation (BBT), Capital One Finance Corporation (COF), Citizens Financial Group, Inc. (CFG), Comerica Incorporated (CMA), Fifth Third Bancorp (FITB), Huntington Bancshares Inc. (HBAN), Keycorp (KEY), M&T Bank Corporation (MTB), MUFG Americas Holding Corporation (MUAH), PNC Financial Services Group (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

IDRs, VRs, AND SENIOR DEBT

The affirmation reflects RF's good capital and liquidity profile. Fitch views greater upside in RF's ratings, and has revised the Rating Outlook to Positive to reflect RF's improving overall credit profile. An upgrade would be predicated on closing the gap with higher rated peers in terms of profitability and asset quality.

Fitch observes that profitability to date still lags the peer average, but on a risk-adjusted basis, Fitch views the earnings profile as more in line with peer averages. Earnings also incorporate a fairly resilient margin, which compares favorably to the peer median. RF maintains relatively lower deposit costs, with loan yields around 16bps better than the peer median.

Further, RF has higher energy-related exposure, particularly to oilfield services companies, than peers, which is expected given its operating footprint. Despite a higher exposure to energy than peers, Fitch views the risk as manageable, and RF has demonstrated success in lowering this exposure with appropriate reserves.

RF's capital profile remains good with an estimated fully phased-in Common Equity Tier 1 ratio under Basel III of approximately 11% at June 30, 2016, around 20bps higher than the peer median. Fitch expects these capital levels will diminish over time, but will remain above peer averages over the near term given CCAR-related capital distribution constraints, the lack of strong organic balance sheet growth, and bank M&A restrictions.

RF has publicly stated its long-term CET1 target is 9.5%. Fitch views RF's capital planning practices as solid, and are informed by appropriate triggers and limits. Fitch expects RF to operate above its long-term target over the near term given the lack of balance sheet growth. RF expects to grow loans less than 3% for the year. Fitch notes that a higher relative capital target is important in light of weaker capital generation capabilities than peers.

RF's liquidity profile remains solid with a low loan-to-deposit ratio, at 84% at quarter-end, and one of the lowest of the large regional peer group. This may provide RF more flexibility in funding loan growth under a more robust economic environment.

Loan growth over the past year for RF has been muted at roughly 2%. This is viewed favorably by Fitch given the competitive lending environment. Some of this loan growth was due to a market slowdown, while the other half was attributed to RF's self-imposed decision to slow lending in certain sectors, including CRE, where RF is approaching internal concentration limits. Further, RF is also de-emphasizing credit-only relationships.

Fitch notes that while multi-family and owner-occupied CRE balances are down from a year ago, RF continues to grow indirect auto and credit card balances. These portfolios comprise 5% and 1% of total loans, respectively, mitigating some of the risk inherent in the relatively robust loan growth in these loan types amidst relatively sluggish economic growth. Fitch notes at June 30, 2016, 0.48% was more than 60 days past due in the indirect auto book, and only 9% has a FICO score less than 620.

Fitch views RF's deposit franchise as a rating strength, especially in light of its higher growth footprint. RF has a very low cost of funds, and stands to benefit from higher than average population growth expectations given its Southeastern footprint. While depositor behavior under a higher interest rate environment is difficult to predict, RF's franchises in Alabama, Mississippi, and Tennessee in particular, where the company holds either the number 1 or number 2 market shares, may prove more resilient to pressures of higher deposit costs, and aid the company's earnings profile.

RF's ratings are currently constrained by asset quality. At June 30, 2016, RF's NPAs were the highest of the peer group due primarily to commercial, particularly energy-related, and CRE nonaccrual loans. Fitch believes RF's TDR accounting practices to be more conservative than peers, and notes that 86% of accruing TDRs are current as of June 30, 2016.

Current loan losses remain low and at the peer median in 2Q16, though Fitch expects them to deteriorate from unsustainably low levels, in part due to RF's energy-related portfolio. RF reported $3.1 billion in total energy-related exposure at June 30, 2016, or around 3.8% of the total loan book, on the higher end of peer averages. Despite some improvement in oil prices from a year ago, Fitch expects some weakness particularly from its oilfield services portfolio, which represents approximately 36% of energy outstandings, which is higher than its peers. RF has built its energy reserves to 9.4% at June 30, 2016, the second highest level among its peer banks. Further, RF has been very successful in reducing direct exposure, down 19% from a year ago.

Fitch views energy-related risk as an earnings headwind for RF, and not necessarily a capital issue. RF anticipates that it will incur between $50 million and $75 million in related losses throughout 2017, and if prices average below $25 a barrel through the end of 2017, RF could experience additional losses of $100 million. At June 30, 2016, RF had $225 million in energy-related reserves against the potential stress losses of up to $175 million through year-end 2017. Given current prices are averaging around $44 a barrel; realizing this level of losses appears remote. Fitch expects that RF may benefit from some reserve releases in this book over time.

In 4Q15, RF was assigned a "needs to improve" CRA rating, despite receiving "High Satisfactory" ratings on the CRA components. RF's CRA rating was downgraded due to the bank's April 2015 consent order with the CFPB related to overdrafts and Regulation E. Regions Bank had self-reported these matters, and provided refunds to the affected customers in 2011 and 2012. Nonetheless, the current CRA rating means the bank will be unable to pursue bank acquisitions until the CRA rating is upgraded. RF expects its next CRA rating will occur in 2016, but the timing of the exam or the results is unclear. The bank's inability to pursue M&A is not viewed as a credit negative.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

RF's subordinated debt is notched one level below its VR of 'bbb' for loss severity. RF's preferred stock is notched five levels below its VR, two times for loss severity and three times for non-performance. These ratings are in accordance with Fitch's criteria and assessment of the instruments non-performance and loss severity risk profiles and have thus been affirmed due to the affirmation of the VR.

LONG- AND SHORT-TERM DEPOSIT RATINGS

The uninsured deposit ratings of Regions Bank are rated one notch higher than RF'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.

HOLDING COMPANY

RF's IDR and VR are equalized with those of its bank, 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 failure and default probabilities.

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 SENSITIVITIES

VR, IDRs, AND SENIOR DEBT

An upgrade of RF's ratings would be driven by the improvement and maintenance of core earnings at peer levels combined with a continued reduction in problem asset levels. Fitch expects the resolution of the rating outlook to be on the latter part of the 12 to 24 month rating horizon as earnings improvement may be difficult to achieve over the next twelve months given the low-rate interest environment.

If overall asset quality continues to modestly improve and further deterioration in RF's energy book is not outsized relative to the performance of peers, this may be consistent with an upgrade. However, if RF's energy portfolio performs noticeably worse than peers, ratings upside may be impacted.

Conversely, a sustained reversal of moderating credit trends, combined with a large decrease in capital, would likely cause the outlook to be revised back to Stable. Fitch expects it will take some time to manage its capital down to its long-term capital target of CET1 of 9.5% given CCAR constraints and subdued organic loan growth expectations. Since RF cannot participate in bank M&A given its CRA rating, if RF were to become much more aggressive with its capital distribution plans under CCAR or began to materially grow its balance sheet, its ratings could be adversely impacted.

Similar to some of its large regional bank peers, RF is continuing to build out its capital markets capabilities. While these businesses can result in much more volatile earnings, Fitch expects that capital markets revenues will remain low relative to total revenues for RF. Outsized growth or contribution from capital markets-related revenues may impede upwards rating momentum.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings for RF and its operating companies' subordinated debt and preferred stock are sensitive to any change to RF's VR.

LONG- AND SHORT-TERM DEPOSIT RATINGS

The long-and short-term deposit ratings are sensitive to any change to RF's Long-and Short-Term IDR.

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.

SUPPORT RATING AND SUPPORT RATING FLOOR

Since RF's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future.

Fitch has affirmed the following ratings:

Regions Financial Corporation

Long-Term IDR at 'BBB'; Outlook Revised to Positive;

Short-Term IDR at 'F2';

Subordinated debt at 'BBB-';

Viability rating at 'bbb';

Senior unsecured at 'BBB';

Preferred stock at 'B+';

Support at '5';

Support floor at 'NF'.

Regions Bank

Long-Term IDR at 'BBB'; Outlook Revised to Positive;

Long-Term deposits at 'BBB+';

Short-Term deposits at 'F2';

Short-Term IDR at 'F2';

Senior debt at 'BBB';

Subordinated debt at 'BBB-';

Viability Rating at 'bbb';

Support at '5';

Support floor at 'NF'.

AmSouth Bancorporation

Subordinated debt at 'BBB-'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Global Bank Rating Criteria (pub. 15 Jul 2016)

https://www.fitchratings.com/site/re/884135

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Contacts

Fitch Ratings
Primary Analyst
Julie Solar
Senior Director
+1-312-368-5472
Fitch Ratings, Inc.
70 West Madison
Chicago, IL 60602
or
Secondary Analyst
Bain Rumohr
Director
+1-312-368-3153
or
Committee Chairperson
Christopher Wolfe
Managing Director
+1-212-908-0771
or
Media Relations:
Hannah James, New York, + 1 646-582-4947
Email: hannah.james@fitchratings.com