The monitor daily reported on the recent downgrade of Regions Bank.
S&P Cuts Ratings on Regions; Outlook Negative
Standard & Poor’s Ratings Services lowered its ratings on Regions Financial Corp., including lowering the counterparty credit rating to BBB-/A-3 from BBB/A-3. The outlook is negative. S&P also lowered its rating on the company’s primary subsidiary Regions Bank to BBB/A-2 from BBB2′.
“The downgrade reflects our expectation that Regions’s profitability levels should continue to be muted during 2010 given certain troubled loan exposures,” said Standard & Poor’s credit analyst Robert Hansen, CFA. “In addition, our credit stress testing, which assumes higher losses for certain loan portfolios, suggests that capital ratios could remain pressured. Nevertheless, capital ratios currently are sound.”
Credit performance in Regions’s loan portfolio could weaken further in 2010 given the bank’s various loan exposures and geographic footprint, S&P said. Specifically, S&P said it thinks the bank’s commercial real estate (CRE), commercial, and consumer loan exposures could experience higher losses than we had anticipated.
“The loan portfolio’s credit performance has not shown signs of stabilizing yet, in our view, as highlighted by the fairly high level of nonperforming asset (NPA) formation and the sequential rise in delinquent loans in fourth-quarter 2009,” the ratings agency said. “We continue to believe that Regions is more vulnerable than its large regional peers to further deterioration given its significant CRE loan exposures and large exposures in the Southeast, particularly in Florida and Georgia, which combined represent nearly 25% of total loans, by our estimate. Our credit stress testing supports these credit-loss expectations.”
S&P noted that Regions’s measures compare unfavorably to some of its large regional bank peers.
“Ongoing operating losses, growth in the balance sheet, and the disallowance of some deferred tax assets have also hurt capital measures somewhat. Regions’s tangible common equity ratio declined to approximately 6.0% as of Dec. 31, 2009, which is below certain large regional bank peers. We believe that capital ratios could trend lower given that we expect net losses to persist in the near term.
However, the company’s good competitive position in the markets in which it operates supports our ratings on Regions. A strong liquidity profile also supports the ratings.
“We have widened the notching of the preferred stock rating with respect to the company’s rating to four notches. Although we do not believe this is an immediate risk, deferral risk would rise if capital ratios were hurt by additional net losses.
The negative outlook reflects our belief that the rating could remain under pressure, given our ongoing concerns regarding Regions’s significant loan exposures to the CRE, commercial, and consumer segments. If credit quality, operating performance, or capital ratios deteriorate beyond our current expectations, we could lower the rating again. More specifically, the rating may come under further pressure if NPAs, including past-due and restructured loans, approach 8% of total loans or if the tangible common equity ratio declines toward 5%. Alternatively, if financial performance improves or stabilizes for several quarters, we could revise the outlook to stable, which we view as less likely given our negative industry outlook for the U.S. banking sector.”
Thursday, March 11, 2010