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On Monday, Moody's Investors Service, a rating arm of Moody’s Corp. (MCO - Analyst Report), completed the review for the upgrade in ratings of Regions Financial Corp. (RF - Analyst Report) and its subsidiaries initiated on Oct 3, 2012. Upon completion, Moody’s upgraded the long-term ratings of Regions and its subsidiaries, while it has maintained the outlook at ‘Stable’.

Regions has been upped to Ba1 from Ba3 for senior debt, while the short-term rating has been affirmed at Not-Prime. Moreover, Regions’ primary subsidiary, Regions Bank has been upgraded to Baa3 from Ba1 for long-term deposits and to Prime-3 from Not-Prime for short-term deposits.

Further, 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 revised upward to baa3.

Reason Behind Upgrade

The rating agency is impressed by Regions’ efforts towards improving asset quality and reducing its risk profile. Moody’s stated that the revision of the ratings came on the back of improvement in most of the credit metrics. Along with net charge-offs and delinquencies, level of nonperforming assets (NPAs) have improved as well.

Over the past two years, 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 Sep 30, 2012, Regions' combined CRE and HE exposures declined to 2.3x  tangible common equity (TCE) from 3.7x TCE as of Dec 31, 2010.

Moreover, the rationale behind the further revision will follow Regions’ efficiency in managing additional risks related to its strategic efforts including diversification of its revenue avenues to overcome continuing earnings pressure in the persistent low interest rate environment.

Previously, in February 2012, Moody's 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 a continued low interest rate environment are projected to limit the stock’s upside potential in the upcoming quarters.

Regions currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We believe that on account of such rating upgrades, there is the possibility of upward earnings estimate revisions. Hence, the stock is expected to see an improvement in its current rank.

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