In yet another sign of dwindling confidence about the company’s performance, Standard and Poor’s (S&P) on Friday lowered the ratings of Regions Financial Corp. (RF) to “BBB-” from “BBB.”

Regions, a regional bank, has a high percentage of commercial mortgage exposure (24% as on Dec 31, 2009) in its loan portfolio. Commercial borrowers generally refinance and roll over the balances into new loans. But tightening credit standards mean that a dwindling number of borrowers would stand to qualify. This would result in increased defaults.

S&P is concerned that Regions’ exposure to troubled loans will weigh on its 2010 profitability. Loan loss provision, which measures the potential future losses, increased to $1.2 billion in the fourth quarter from $1.0 billion in the third quarter. Nonperforming assets (including loans 90 days past due) increased to 5.59% up from 5.08% in the third quarter and 2.33% in the year-ago quarter.

Regions’ charge-offs, which showed signs of stabilization, remained at elevated levels, at $692 million in the fourth quarter. This was up from $680 million in the third quarter but down from $796 million in the year-ago quarter. Though an improvement in credit quality metrics is slightly visible, the pace of improvement is expected to be slow.

Moreover, the asset-sensitive nature of the Regions balance sheet makes it more vulnerable to the low interest rate environment, which has pressured its net interest margin. The company has also been aggressively disposing of problematic loans and has got rid of $2.7 million of problem assets over the last five quarters.

Positives include the strong capital position with Tier 1 common ratio at 7.2% and Tier 1 capital ratio at 11.6%.
Read the full analyst report on “RF”
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