According to a June 30, 2009 article in the Memphis Commercial Appeal Regions Financial is disputing a report by in trade publication American Banker (AB)that the bank plans to sell it brokerage unit Morgan Keegan.
According to the article, Regions Morgan Keegan remains an integral part of Regions Financial Corp., which has no plan to sell its Memphis-based investment firm.
The AB article, which used named and unnamed sources, suggested that if Regions were to suffer more, significant loan losses, it might have to sell Morgan Keegan to find extra capital. This is not a new strategy and one employed by Citigroup when it entered into a merger agreement to transfer half ownership of Salomon Smith Barney to Morgan Stanley.
A portion of the article appears below:
Birmingham-based Regions Financial recently raised $2.5 billion required by the Treasury in response to the government’s stress tests of banks. The idea was to prepare banks should the economy falter even more.
Regions was able to raise the capital in just over a month.
But to do so, it deeply discounted — by 24 percent — bank shares in a stock offering and may not be able to use that source again, the American Banker reported. Also, the bank offered to swap up to $700 million in common stock to the holders of debt securities paying 6.625 percent. But the offering achieved just a 29 percent acceptance, generating $202 million for the bank, the American Banker noted.
Regions spokesman Tim Deighton described the report as “very speculative.”
“Our capital levels are among the highest of our peers. We raised $2.5 billion in a little over a month. Any suggestions that we need to raise additional capital are highly unfounded,” he said.
For the stress test, the government hypothetically imposed a worst-case scenario of $9.2 billion in loan losses for Regions over the next two years, which is higher than most people expect, Deighton said.
“The nature of our credit issues has not changed,” he said.
Regions loan problems are centered in Florida and the Atlanta areas. Most of the bad loans were made to home builders, and for condos and land.
Other types of loans, such as traditional first mortgages and commercial and industrial loans, are not as big a problem for the bank, and Regions is not in the credit card business.
“We’ve been very aggressive in identifying and working out troubled loans,” Deighton said.
A senior bank research analyst for FTN Equity Capital Markets agrees.
Regions has raised enough capital to endure a significant downturn in the economy, Marty Mosby said.
“The second thing to keep in mind is that Regions management has been very consistent about Morgan Keegan being a part of their core business,” he said.
Regions has integrated Morgan Keegan into its banking units, “making sure they cross-sell and expanding relationships across both entities,” Mosby said.
The integration of Morgan Keegan and Regions has been under way several years.
“Given those two facts, I think it’s realistic to think management doesn’t have a motivation to sell and at this point are not in a position where they have to sell,” Mosby said.
Another condition that would discourage any sale is the sum Morgan Keegan would bring to Regions right now, said Christopher Marinac, director of research for FIG Partners.
Region’s couldn’t get the price they’d want in the current economy, he said.
“They would want something north of a billion dollars, and I’m not sure if that price is available to them,” Marinac said.
“My expectation would be they don’t sell Morgan Keegan until they can get a price they desire.”
Meanwhile, FIG Partners is rating Regions shares to perform in line with other bank stocks.
Regions Stress Test
Worst-case scenario: If the economy worsens, bank could be saddled with $9.2 billion more in bad loans over the next two years
Had to raise: $2.5 billion in capital just in case
What now? Aggressively working to sell off its bad loans involving second mortgages and loans to home-builders and for condos.
Morgan Keegan: Investment firm, a subsidiary of Regions Financial, has more than 300 offices in 19 states
Our firm is currently investigating and filing claims on behalf of Morgan Keegan clients who suffered substantial losses in the Regions Morgan Keegan (RMK) bond and income fund. If you lost money in one of these funds, please contact our offices for a review of your options for recovering your losses. Thank you.