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On Sep 26, 2013, we downgraded our long-term recommendation on Regions Financial Corp. (RF - Analyst Report) to Neutral from Outperform based on reducing non-interest income. Moreover, the company’s second-quarter 2013 earnings from continuing operations of 21 cents per share were in line with the Zacks Consensus Estimate and compared unfavorably with the prior-quarter earnings.

Why Neutral?

Though Regions is taking initiatives to increase revenue, non-interest income has seen a declining trend over the last four years. Notably, the income declined 3.2% year over year for the six months ended Jun 30, 2013. The continuation of such a trend will pose a risk for the top-line growth of the company.

We are also concerned about regulatory issues, which are expected to pose as headwinds for the company’s profitability going forward. Such regulations are likely to reduce fee income growth prospects, increase compliance costs and subject the company to a number of restrictions.

Despite the macro pressure, Regions’ credit quality continues to normalize. In spite of the slow and uneven pace of the economic recovery, Regions experienced significant improvement in both 2011 and 2012 and thereafter. Further, we are impressed to see the overall improving trend in delinquencies rates and net charge-offs. This trend is expected to continue, thereby providing room to drive future earnings.

For Regions, the Zacks Consensus Estimate for 2013 dipped 1.2% to 84 cents per share, over the last 60 days. However, for 2014, the Zacks Consensus Estimate remained stable at 89 cents per share, over the same time frame. Hence, Regions carries a Zacks Rank #3 (Hold).

Other Major Banks to Consider

Some Southeast banks that are worth considering include SY Bancorp Inc. (SYBT - Snapshot Report), Middleburg Financial Corporation (MBRG - Snapshot Report) and Simmons First National Corporation (SFNC - Snapshot Report). All the 3 banks carry a Zacks Rank #1 (Strong Buy).

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