Regions Financial (RF) Down 5.6% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Regions Financial (RF). Shares have lost about 5.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Regions Financial due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Regions Financial Q1 Earnings Meet Estimates, Revenues Up

Regions Financial reported first-quarter 2019 earnings of 37 cents per share, up 5.7% year over year. Results came in line with the Zacks Consensus Estimate.

Income from continuing operations available to common shareholders was $378 million compared with $398 million reported in the year-ago quarter.

Easing margin pressure, lower expenses and higher revenues were the positive factors. Moreover, credit quality recorded significant improvement. Additionally, loans and deposits escalated. However, lower fee income, backed by reduced capital markets and mortgage banking income, were major drags.  Additionally, elevated provisions were an undermining factor.

Revenues Up Y/Y, Costs Drop

Adjusted total revenues (net of interest expense) came in at $1.45 billion in the reported quarter, missing the Zacks Consensus Estimate of $1.46 billion. However, the top line climbed 2.6% from the year-ago quarter figure.

Regions Financial reported adjusted pre-tax pre-provision income from continuing operations of $597 million, up 8.5% year over year.

On a fully-taxable equivalent (FTE) basis, net interest income was $961 million, up 4.2% year over year. Net interest margin (on an FTE basis) expanded 7 basis points (bps) to 3.53% in the first quarter. Elevated market interest rates led to this upside, partially mitigated by higher deposit costs.

Non-interest income edged down 1% to $502 million. Lower capital markets, mortgage income and other income primarily resulted in this downside. However, these negatives were partly offset by higher card & ATM fees, service charges on deposit account, commercial credit fee income, bank-owned life insurance and wealth management income.

Non-interest expenses dropped 1.2% year over year to $852 million. On an adjusted basis, non-interest expenses slipped 2.7% to $860 million, mainly due to fall in almost all components of expenses, partly offset by higher branch consolidation, property and equipment charges, credit card costs, Visa class B shares expenses and other expenses.

Adjusted efficiency ratio came in at 58.3% compared with 60.5% in the prior-year quarter. A lower ratio indicates a rise in profitability.

Balance-Sheet Strength

As of Mar 31, 2019, adjusted total loans were up 2.3% sequentially to $80.8 billion. Further, total deposits came in at $94.2 billion, up 1.1% from the prior quarter.

As of Mar 31, 2019, low-cost deposits, as a percentage of average deposits, were 91% compared with 92.9% as of Mar 31, 2018. In addition, deposit costs were 46 basis points (bps) in the first quarter.

Credit Quality: A Mixed Bag

Non-performing assets, as a percentage of loans, foreclosed properties and non-performing loans held for sale, shrunk 14 bps from the prior-year quarter to 0.71%. Also, non-accrual loans, excluding loans held for sale, as a percentage of loans, came in at 0.62%, shrinking 13 bps year over year.

Allowance for loan losses as a percentage of loans, net of unearned income was 1.01%, down 4 bps from the year-earlier quarter. The company’s total business services criticized loans slipped 4.5% year over year.

Further, adjusted net charge-offs, as a percentage of average loans, came in at 0.38%, decreasing 2 bps. Provision for loan losses was $91 million compared with credit provision of $10 million witnessed in the prior-year quarter.

Strong Capital Position

Regions Financial’s estimated ratios remained well above the regulatory requirements under the Basel III capital rules. As of Mar 31, 2019, Basel III Common Equity Tier 1 ratio (fully phased-in) and Tier 1 capital ratio were estimated at 9.8% and 10.6%, respectively, compared with 11.1% and 11.9% recorded in the year-earlier quarter.

During the January-March quarter, Regions Financial repurchased 12.2 million shares of common stock for a total cost of $190 million and announced $142 million in dividends to common shareholders.

Outlook

Regions Financial expects adjusted expenses to remain relatively stable in 2019.

The company expects full-year 2019 adjusted total revenue growth in the range of 2-4%.

With respect to net interest margin, rates consistent with the current yield curve and moderate balance sheet growth are expected to generate a relatively stable to modestly lower full-year margin, implying moderate margin compression for the rest of 2019.

Capital markets income is anticipated to increase in second-quarter 2019.

Management expects adjusted average loans in 2019 to grow in low single digits on a year-over-year basis.

Net charge-offs are estimated at 40-50 bps for 2019.

The effective tax rate is projected in the range of 20-22% for 2019.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Regions Financial has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Regions Financial has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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