(RF) Standard & Poor’s Ratings Services Ups Regions Financial’s Rating Outlook

On Friday, Standard & Poor’s Ratings Services (S&P) lifted its outlook on Regions Financial Corp. (RF) and its subsidiary Regions Bank to ‘Stable’ from ‘Negative.’ The rating agency is impressed by Regions’ improved loan performance.

The revision to Stable outlook reflects S&P’s anticipation of profit trend to continue in the upcoming quarters marked by improvement in Regions’ loan loss provisions. Provision for loan losses fell 17% sequentially and 39% year over year to $398 million as of June 30, 2011. S&P also confirmed “BB+/B” counterparty credit rating on Regions and “BBB-/A-3” rating on Regions Bank.

Regions’ steady earnings performance drives S&P to provide a Stable Outlook on the stock. On the other hand, significant deterioration in earnings, liquidity or increase in risk and leverage, would unfavorably influence its ratings.

Regions’ second-quarter 2011 earnings came in at 4 cents per share, topping the Zacks Consensus Estimate of a break-even. Quarterly results benefited from lower loan loss provisions and represented the company’s third consecutive quarterly profit after incurring losses since the second quarter of 2009.

Adjusted earnings per share, excluding regulatory adjustments and significant items, came in at 4 cents per share for the reported quarter compared with a loss of 3 cents in the prior quarter and 11 cents in the year-ago quarter.

Regions’ brokerage and investment banking subsidiary, Morgan Keegan, reached a settlement with the SEC, FINRA and state regulators. The financial impact of the $210 million regulatory settlement on the second quarter earnings was a $44 million tax benefit on a part of the settlement that had been previously accrued as non-deductible.

As of June 2011, Regions also had Negative outlook from Fitch Ratings and Moody’s Investors Service, the ratings arm of Moody’s Corp. (MCO).

Further, the ratings affirmation reflects Regions’ buoyancy during the crisis. Despite some of the regulatory uncertainties and intricate operating environment, the company maintained well-built liquidity profile, established earnings power and strong franchise.

In an effort to boost its core franchise through productivity and efficiency initiatives, Regions will consolidate approximately 40 branches later this year. While it recorded associated property valuation charges on the branches, plus other property and equipment charges of $77 million in the June quarter, it anticipates realizing net cost savings of approximately $19 million annually.

Additionally, based on the Federal Reserve Board of Governors’ final rule on debit card interchange fees mandated by the Durbin Amendment to the Dodd-Frank Act effective from October 1, 2011, Regions projects that the impact on annual debit interchange revenue will be around $170 million before any mitigation efforts.

Recently, Regions entered into an agreement with Western Union Co. (WU) to enhance services offered to its customers. Under the terms of the deal, Regions will provide Western Union global money transfer services and faster bill payment services across its 1,700 locations in the U.S. The transaction with Western Union will aid Regions in offering a broader suite of products and services to its customers and communities as per their needs.

Regions also completed the purchase of the credit card portfolio of $1 billion from FIA Card Services, a subsidiary of Bank of America Corporation (BAC), effective June 30, 2011. Through the acquisition, Regions re-entered the credit card business, which it exited a decade ago. Prior to the agreement, Regions used to sell customers credit cards held and serviced by BofA’s card business.

With focus on the affluent segment, in late June, Regions announced the formation of a new Wealth Management Group, integrating its Trust, Private Banking and Insurance units within a single business line.

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, regulatory issues also remain.

Finally, based on the recent developments ongoing in Regions and its June quarter results, S&P anticipates the company to redeem its preferred shares sold to the Treasury under the Troubled Asset Relief Program (TARP) soon.

Regions currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Moreover, considering the fundamentals, we maintain a long-term Neutral recommendation on the stock.

BANK OF AMER CP (BAC): Free Stock Analysis Report

MOODYS CORP (MCO): Free Stock Analysis Report

REGIONS FINL CP (RF): Free Stock Analysis Report

WESTERN UNION (WU): Free Stock Analysis Report

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