(MCO) Regions Financial under Review by Moody’s

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.

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