On Wednesday, Moody's Investors Service, a rating arm of
Moody's Corp.
(
MCO
) kept the long-term ratings of
Regions Financial Corp.
(
RF
) and its subsidiaries under review for upgrade. The rating agency
is impressed by Regions' efforts of reducing its risk profile.
Currently, Regions has a Ba3 rating for senior debt and B1 for
subordinated debt as specified by Moody's. Moreover, Regions'
primary subsidiary, Regions Bank has a standalone bank financial
strength rating of D+ which has been affirmed. However, the
baseline credit assessment of ba1 for the bank has been placed
under review for upgrade.
Reason Behind Upgrade
Moody's stated that the revision of the ratings will depend on
Regions' initiatives in reducing its level of non-performing assets
(NPAs). NPAs remained high at 7.3% of loans including other real
estate owned (OREO) or 48% tangible common equity (TCE) including
reserves as of June 30, 2012.
Over the past eighteen months, Regions has been working hard to
reduce its risk profile. The attempts are visible as its asset
concentrations have declined, including commercial real estate
(CRE) and home equity (HE). As of June 30, 2012, Regions' CRE
and HE exposures declined 40% and 13%, respectively from December
31, 2010.
Moreover, the rationale behind the revision will follow Regions'
strategic efforts including diversification of its revenue avenues
to overcome earnings pressure in the persistent low interest rate
environment.
Previously, in February 2012, Moody's also upped the rating outlook
for Regions and its subsidiaries, including Regions Bank to
'Stable' from 'Negative'. The positive action came on the back of
Regions' reduction in risk concentrations and stabilization of the
company's asset quality.
Rating Actions by other Agencies
Following the announcement of Regions' repayment of Troubled Asset
Relief Program (TARP) funds, in March 2012, Standard & Poor's
Ratings Services lifted its long and short-term issuer credit
ratings on Regions to 'BBB-/A-3' from 'BB+/B'. It also upped
ratings on Regions Bank to 'BBB/A-2' from 'BBB-/A-3'.
Moreover, as of June 2012, Fitch Ratings holds 'BBB-' for senior
debt on Regions, with the 'Stable' rating outlook.
Our Viewpoint
The rating upgrades are valuable for Regions as they play a major
role in preserving investor confidence in the stock and help boost
its creditworthiness in the market.
Overall, Regions' favorable funding mix, improved core business
performance, its expansion mode and strategies will continue to
yield profitable earnings in the upcoming quarters. Improvement in
credit quality is also encouraging. While de-risking measures are
encouraging at Regions, the upfront costs of such initiatives
cannot be ignored.
Besides, a tepid economic recovery, regulatory issues along with
the expectation of continued low interest rate environment are
projected to limit the stock's upside potential in the upcoming
quarters.
Regions currently retain a Zacks #2 Rank, which translates into a
short-term Buy rating.
MOODYS CORP (MCO): Free Stock Analysis Report
REGIONS FINL CP (RF): Free Stock Analysis
Report
To read this article on Zacks.com click here.
Zacks Investment
Research