Regions Financial Corporation’s (RF - Analyst Report) rating has been affirmed at ‘BBB/F2’ by Fitch Ratings. The affirmation indicates the company’s sound capital and liquidity profile, improving earnings and consistent asset quality enhancement. Further, the rating outlook has been revised to ‘Positive’ from ‘Stable’.
Notably, the rating agency expects greater upside in the bank’s ratings. Further, the revised outlook reflects the bank’s improving credit profile.
While Regions Financial’s Long-Term IDR, Senior unsecured debt and Viability rating stands at BBB, its Short-Term IDR rating is F2.
Reasons for the Outlook Revision
According to Fitch, Regions Financial’s earnings profile (on a risk-adjusted basis) is in line with its peers. Further, the bank’s earnings reflect fairly resilient margin, which compares favorably to the peer median.
The bank has a higher energy-related exposure than its peers owing to its operating footprint. However, Fitch views the bank’s risk profile as manageable, as it has been able to successfully lower its exposure.
Further, the rating agency anticipates the bank’s capital levels to remain above peer averages over the near term. This will be possible due to CCAR-related capital distribution constraints, bank M&A restrictions and lack of organic growth.
Moreover, Fitch considered the bank’s muted loan growth over the past years, its deposit franchise and solid liquidity profile, along with a low loan-to-deposit ratio in determining the outlook.
Factors that Can Trigger a Rating Upgrade
Regions Financial’s rating could be upgraded if the bank is able to improve profitability and asset quality to high-rated peer levels.
Further, if energy portfolio performance does not deteriorate more than its peers, an upgrade is possible for the bank.
Factors that Lead to a Rating Downgrade
If Regions Financial’s energy portfolio performs worse than its peers, the bank’s rating may be adversely affected.
Also, given its "needs to improve" CRA rating, the bank cannot participate in mergers and acquisitions (M&A). Being more aggressive with capital distribution plans under CCAR or initiating balance-sheet growth materially could also impact its rating.
Further, Fitch projects the bank’s capital market revenues to remain low compared to the total revenue. Revenues generated from capital markets or outsized growth may deter upward rating momentum.
Moreover, a sustained reversal of moderating credit trends, along with a large decline in capital, could bring down the outlook to ‘Stable’.
Notably, Fitch expects the changes in outlook to occur in the latter part of the 12–24 month rating horizon. This is because an improvement in earnings may be hard to attain over the next 12 months due to the low interest rate environment.
Some stocks in the finance space worth considering include Farmers Capital Bank Corporation (FFKT - Snapshot Report) , FCB Financial Holdings, Inc. (FCB - Snapshot Report) and Banco Macro S.A. (BMA - Snapshot Report) . All the stocks have delivered an average positive earnings surprise over the trailing four quarters.
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