S&P Lowers Regions' Rating - Analyst Blog

Regions Financial Corp. (RF) was downgraded by Standard & Poor's Ratings Services (S&P) last week. The downgrade follows an annual review of the company's financial performance.

S&P cut its counterparty credit rating for Regions to BB+/B from BBB-/A-3, with a negative outlook. Additionally, its main subsidiary Regions Bank's rating was also lowered to BBB-/A-3 from BBB/A-2.

According to the rating agency, losses at Regions are expected to continue longer than the rating agency had predicted. The capital ratios remain pressured in the near term, with the company having significant exposure to commercial real estate and unfavorable geographic concentration.

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

Asset quality concerns have been an issue for Regions for the past several quarters, and the management reshuffle raises fresh concern about the company's 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 duress.

Regions Financial reported a net loss of 17 cents per share, missing 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. Recent legislative actions have also impacted the company's non-interest income. 

We believe that the de-risking measures at Regions are encouraging, though the upfront costs of such initiatives cannot be avoided. Moreover, with the changes in management, the risk mitigation initiatives and pace of recovery remain uncertain. 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.