Investors familiar at all with Regions Financial (NYSE:RF) and its current position should be well aware that there are some significant risks facing the bank. But which risks are the most important to keep on eye on? I believe the following three should be front and center in investors' minds.
The weak bank problem
When there is tumult in the banking industry, the weakest banks are the most affected. We saw in 2008 what happens. When the industry shows weakness, or a large player fails, the speculation runs to which bank will be next. The speculation becomes reality when scared customers start pulling out deposits -- the lifeblood funding of banks.
Among the megabanks like Citigroup (NYSE:C), depositors can take some comfort in the idea that "too big to fail" means that the government will step in if things get too dicey. The same doesn't go for many of the country's smaller banks, and that's an advantage for the stronger regional banks like M&T Bank (NYSE:MTB) and BB&T (NYSE:BBT).
Regions is firmly in the camp of the weaker banks. As evidence, its credit rating for senior debt is the lowest that's still investment grade per S&P, and isn't investment grade per Moody's. A robust economic recovery could have an outsized benefit for Regions, but the opposite could be disastrous.
Regions was founded in and still has its largest presence in the Southeastern U.S. If the business climate or real estate markets in the Southeast lag that of the rest of the United States, Regions would have a harder time acquiring deposits and generating successful loans.
Old habits die hard
As Regions tries to put its past poor decision-making behind it, it's helped by the tailwind of a healthy economy. The hope is that the new loans it's generating today are much more conservative than the loans of the past. The risk is that credit metrics look artificially better because of the runoff of old loans and a better economy helping keep borrowers current. As Warren Buffett says, "Only when the tide goes out do you discover who's been swimming naked."
Anand Chokkavelu, CFA, owns shares and warrants of Citigroup. The Motley Fool owns shares of Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.