Regions Financial Rebukes Treasury Findings

From the PR on Regions' (RF) website, RF isn't too happy with the stress test results showing they need to raise $2.5B of additional capital. For the most part, RF has been relatively quiet during the whole turmoil in the financial markets. It's encouraging to see the company put up a fight. Heck, it's encouraging to see any financial company put up a fight. Specifically RF doesn't think the loan loss expectations for Commercial Real Estate made by the government reflect what the company will likely report down the road. 3x the current loss ratio does seem excessive. They also show how if RF was treated similar to other banks tested that they would need little to no capital.

The company questions why it should be forced to raise capital for an adverse economic scenario when Bernanke is positive about the 2nd half of 2009. What's odd about these tests is that even if the adverse scenario happened, it wouldn't be like RF would have zero capital. It would just place it below the well capitalized threshold. And if that's the worst that happens during the worst economic storm in 70 years, why force such a dilutive capital raise at the bottom? I'm glad to see RF fire back at the government. It's had lower losses than the industry, but some how it's been subjected to higher test standards. Assuming the economy continues to improve, I wonder if RF will have to raise the $2.5B in capital? The argument by the government could easily lose steam in 3-4 months.

Some of the arguments from RF:

• The company believes the estimated losses even in the more adverse scenario are unrealistically high given Regions’ actual loss experience during the current recession. The assessment’s estimated losses of $9.2 billion during 2009 and 2010 would require a loss rate of almost triple Regions’ actual first quarter 2009 loan losses of $390 million.

• Regions believes that the SCAP results do not accurately reflect the loan losses that Regions is likely to experience even in the “more adverse” economic scenario. In particular, the anticipated two-year cumulative loss ratio of 13.7% on commercial real estate is sharply higher than both Regions’ actual annualized loss ratio on this portfolio in the first quarter and sharply higher than that projected for the other banks. If Regions’ projected cumulative two-year losses on this portfolio were at the 8.5% aggregate level for the 19 tested banks, the capital raise commitment would be approximately $500 million; if the projected cumulative losses were 50% higher than the bank’s annualized first quarter commercial real estate losses, Regions would not be required to raise capital.

Disclosure: Long RF.

Comments

[Ishortyou:]

Well the situation is very simple and the media and the general public opinion do not get it, the solution to the banks balance sheets rest on the OVERSUPPLY IN HOUSING!!!!!! meaning that the homebuilders need to get rid off inventories instead of pumping new house starts or getting new building permits, in those homebuilders business tactics is where lies the speed of recovery for the banks.

May 08 05:47 AM

[pelican:]

"Assuming the economy continues to improve, I wonder if RF will have to raise the $2.5B in capital? "

The economy is improving??

May 08 06:25 AM

[jamesa40:]

Commercial real estate is lagging the market. The other shoe is yet to drop as stores continue to close due to lack of spending. Not to mention the huge amount of loan refi's that will have to be approved by the banks in the next two years. Don't count on that happening.

May 08 08:20 AM

[Ishortyou:]

Commercial real state will have to be renegotiated just like many home real state are been as we speak.

May 08 08:43 AM

[helplessobs...:]

One giant mistake in the RF loan portfolio was documented in the WSJ. They financed part of a huge office tower expansion in the Buckhead area of Atlanta. Problem is these buildings come after a major expansion in the same area. Now the first buildings up are losing tenants on top of already vacant space. BA and ManuLife of Canada are lenders that also came late to the party. I expect these construction loans will be on the books for quite awhile hence the need for more bank capital to protect depositors money.

May 08 11:25 AM

[Stone Fox C...:]

Of course the economy is improving. The markets are telling us that. That's why RF was up 25% today even though just about everybody thought a $2.5B capital raise would cause them to blow up. And sure they have issues in com'l real estate, but 13% losses? All the banks have issues there, but why higher for RF? The action today was very bullish. How many participated?

May 08 05:13 PM

[Stone Fox C...:]

Don't really have a near term target, but I'd think a move to $10 is warranted based on book value and moves of other banks. At that point, I'd re-evaluate this stock.

May 10 05:50 PM