Rating Agencies Downgrade Regions - Analyst Blog

Rating agencies have downgraded Regions Financial Corporation (RF) following leadership changes in its Risk Management Group subsequent to the resignation of its chief risk officer. 

Both the rating agencies – Fitch Ratings and Moody's Investors Service, a unit of Moody's Corp. (MCO) – have shrunk Regions' ratings. Asset quality issues and the management reshuffle in the Risk Management team are the primary reasons for this rating downgrade. While the chief risk officer and the head of Problem Asset Management left the company, the director of Credit Risk retired. 

Fitch Ratings has lowered the long-term Issuer Default Rating (IDR) of Regions Financial and its subsidiary to 'BBB-' from 'BBB+' and short-term IDR to 'F3' from 'F2'. The outlook remained ‘Negative'.

Moody's, on the other hand, brought down Regions Financial's senior debt ratings to Ba3 from Ba1, the long-term deposit ratings of Regions Bank to ‘Ba1' from ‘Baa3' and its short-term to ‘Not-Prime' from ‘Prime-3'. All long-term ratings were placed under review for a possible changes. This is the second time in November that Regions' ratings were lowered by Moody's. On November 1, Moody's had lowered the senior debt rating one level from ‘Baa3'.

While asset quality concerns have been an issue for Regions since the past several quarters, the management reshuffle raises fresh concern about the company's future course of actions in addressing credit quality issues.Regions has been plagued by souring  loans and elevated levels of nonperforming assets for the past several quarters. It has a significant exposure to the Florida and Georgia markets, both of which are still under severe stress.

Third Quarter Results 

Regions Financial's third quarter results missed the Zacks Consensus Estimate. The company reported a net loss of 17 cents per share, compared with the Zacks Consensus Estimate of a loss of 10 cents per share. 

Results were significantly impacted by the continued de-risking of the balance sheet and the high disposition of problem assets. Also, recent legislative actions have impacted the company's non-interest income though favorable funding mix and deposit pricing have led to better net interest income figures. 

Provision for loan losses equaled net charge-offs at $760 million, increasing from $651 million. Allowance for loan losses to net loan ratio increased to 3.77% from 3.71% in the prior quarter and 2.83% in the year-ago quarter. 

Results were significantly impacted by the continued de-risking of the balance sheet and the high disposition of problem assets. Also, recent legislative actions have impacted the company's non-interest income though favorable funding mix and deposit pricing have led to better net interest income figures.  

Our Take 

While the de-risking measures at Regions are encouraging, the upfront costs of such initiatives cannot be avoided. Additionally, with the management changes, the future course of actions and the pace of recovery remains uncertain.  

Moreover, the post regulatory environment and several recent legislative actions have affected both top and bottom lines and is expected to continue thus in the upcoming quarters. Nevertheless, the favorable funding mix and an expected improvement in the economy in the coming quarters would support the company's earnings.  

Regions currently maintains its Zacks #3 Rank, which translates to a short-term Hold rating.

 
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