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Regions Financial (RF) Up 10% Since Earnings Report: Can It Continue?
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It has been about a month since the last earnings report for Regions Financial Corporation (RF - Free Report) . Shares have added about 10% in that time frame, , outperforming the market.
Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Regions Q4 Earnings Beat, Expenses Flare Up
Regions’ fourth-quarter 2016 earnings from continuing operations of $0.24 per share surpassed the Zacks Consensus Estimate of $0.22. Also, the figure was 9.1% higher than the prior-year quarter earnings. On an adjusted basis, earnings per share came in at $0.23.
Better-than-expected results were supported by impressive growth in revenues. Further, the quarter recorded continued growth in loans and deposits and capital position remained strong. However, credit quality reflected a mixed bag; while energy sector concerns seem to be easing. Rise in operating expenses was also a downside.
Income from continuing operations available to common shareholders was $278 million, up 2.2% year over year.
For 2016, income from continuing operations available to common shareholders was $1.1 billion compared with $1.0 billion in 2015. Earnings per share from continuing operations were $0.87, up from $0.76 in 2015. Results were in line with the Zacks Consensus Estimate.
Revenue Improves, Costs Up
For 2016, adjusted total revenue (net of interest expense) came in at $5.57 billion, up 4.5% year over year. However, the figure was below the Zacks Consensus Estimate of $5.58 billion.
Adjusted total revenue (net of interest expense) came in at $1.39 billion in the quarter, up 2.1% year over year. Additionally, the figure was in line with the Zacks Consensus Estimate.
Regions Financial reported adjusted pre-tax pre-provision income from continuing operations of $488 million, up 2.3% year over year.
On a fully taxable equivalent (FTE) basis, net interest income was $874 million, up 2.1% year over year. Net interest margin (on an FTE basis) expanded 8 basis points (bps) year over year to 3.16% in the quarter.
Regions Financial reported 1.6% growth in non-interest income to $522 million. On an adjusted basis, non-interest income increased 2% from the prior-year quarter, reflecting a rise in almost all components of non-interest income.
Non-interest expense was up 3% year over year to $899 million. On an adjusted basis, non-interest expenses rose 1.9% year over year to $877 million.
Balance Sheet Strength
As of Dec 31, 2016, total loans were up 1.4% year over year to $80.1 billion. Further, total deposits were $99.0 billion, up about 1% from the prior-year quarter. Total funding costs were 30 bps.
As of Dec 31, 2016, low-cost deposits as a percentage of average deposits, were 92.0% compared with 92.4% as of Sep 30, 2016. Further, deposit costs came in at 13 bps in the reported quarter.
Credit Quality: A Mixed Bag; Energy Headwinds Eases
Non-performing assets, as a percentage of loans, foreclosed properties and non-performing loans held for sale, expanded 24 bps from the prior-year quarter to 1.37%. Also, non-accrual loans, excluding loans held for sale, as a percentage of loans, came in at 1.24%, up 28 bps from the year-ago quarter.
Allowance for loan losses as a percentage of loans, net of unearned income was 1.36%, in line with the prior-year quarter. Moreover, provision for loan losses was $48 million, down 30.4% year over year.
However, net charge-offs as a percentage of average loans came in at 0.41%, up 3 bps. Further, the company’s total business services criticized loans climbed 7.1% year over year mainly due to risk rating migration in the energy portfolio.
Strong Capital Position
Regions Financial’s estimated ratios remained well above the regulatory requirements under the Basel III capital rules. As of Dec 31, 2016, Basel III Common Equity Tier 1 ratio (fully phased-in) and Tier 1 capital ratio were estimated at 11.0% and 11.9%, respectively, compared to 10.7% and 11.7% in the prior-year quarter. At the end of the quarter, leverage ratio was 10.1% compared with 10.3% in the year-ago quarter.
During 2016, Regions Financial returned about $1.2 billion as capital to shareholders through dividend payments and common stock repurchases.
Outlook
Rise in interest rates by the Fed in December reduced the amount of the premium amortization on mortgage related securities and is expected to decline further in the first quarter of 2017. If interest rates remain at current levels, or continue to rise, management expects to benefit from marginal declines in premium amortization ultimately achieving a quarterly run rate in the low to mid $30 million range in 2017.
For 2017, Regions expects NII and other financing income growth in the range of 2–4% and adjusted non-interest income is estimated to grow above 3–5%.
Regions projects adjusted expenses to trend from a flat to 1% increase, while efficiency ratio is expected to scale at approximately 62% in 2017. Adjusted operating leverage is expected in the range of 2–4%.
Owing to current global macroeconomic headwinds, management’s plan to curb $300 million of core expenses over the coming three years is on track. Further, encouraged by recent increases in market interest rates, management continues to expect to eliminate additional $100 million by 2019.
Management expects low-single-digit average loan growth and average deposit balance in 2017.
Net charge-offs (NCOs) are estimated at 35–50 basis points for 2017.Direct energy charge-offs are expected to be less than $40 million in 2017, given current market conditions. Should oil prices average below $25 a barrel through the end of 2017, the company is likely to experience additional losses of around $100 million over the next eight quarters.
In addition to share buybacks and dividend payments, management intends to undertake bolt-on fee income acquisitions as a measure of capital deployment.
Notably, the 2017 expectations are based on certain assumptions, including GDP growth of 2–2.5%, projected decline in indirect vehicle loans, expanded fee income opportunities, consistent cost-reduction efforts, average Fed Funds rate of 81 bps and average 10-year Treasury rate of 2.26%. Additionally, the company assumes to remain on track to achieve the target of 150 branch consolidations by the end of 2017.
Management sold affordable housing residential mortgage loans worth $171 million to Freddie Mac during the fourth quarter which recorded a gain of $5 million. About $91 million of these loans included recourse and will remain in loans held for sale at year-end, until the recourse expires later in 2017. Subsequent to the expiration of recourse provisions, it is expected that an additional $5-million gain will be recognized.
The effective tax rate is projected to be in the 30–32% range for 2017.
The company separately provided long-term financial targets, along with strategic initiatives focused on growing and diversifying revenues, expense management and effective capital deployment. Regions anticipates adjusted EPS Compound Annual Growth Rate (CAGR) of 12–15% during the 2016–2018 period, adjusted efficiency ratio of below 60% and adjusted ROATCE in the range of 12–14% by 2018. Furthermore, management targets elimination of core expenses by $400 million by 2019.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed an upward trend in fresh estimates. There have been seven revisions higher for the current quarter compared to two lower. While looking back an additional 30 days, we can see even more upward momentum. There have been nine upward revisions in the last two months.
At this time, Regions Financial's stock has a subpar score of 'D' on both growth and momentum front. However, the stock was allocated a grade of 'B' on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregte VGM Score of 'C'. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for value based on our styles scores.
Outlook
While estimates have been broadly trending upward for the stock, the magnitude of these revisions has been net zero. It comes with little surprise that the stock has a Zacks Rank #2 (Buy). We are expecting an above average return from the stock in the next few months.
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Regions Financial (RF) Up 10% Since Earnings Report: Can It Continue?
It has been about a month since the last earnings report for Regions Financial Corporation (RF - Free Report) . Shares have added about 10% in that time frame, , outperforming the market.
Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Regions Q4 Earnings Beat, Expenses Flare Up
Regions’ fourth-quarter 2016 earnings from continuing operations of $0.24 per share surpassed the Zacks Consensus Estimate of $0.22. Also, the figure was 9.1% higher than the prior-year quarter earnings. On an adjusted basis, earnings per share came in at $0.23.
Better-than-expected results were supported by impressive growth in revenues. Further, the quarter recorded continued growth in loans and deposits and capital position remained strong. However, credit quality reflected a mixed bag; while energy sector concerns seem to be easing. Rise in operating expenses was also a downside.
Income from continuing operations available to common shareholders was $278 million, up 2.2% year over year.
For 2016, income from continuing operations available to common shareholders was $1.1 billion compared with $1.0 billion in 2015. Earnings per share from continuing operations were $0.87, up from $0.76 in 2015. Results were in line with the Zacks Consensus Estimate.
Revenue Improves, Costs Up
For 2016, adjusted total revenue (net of interest expense) came in at $5.57 billion, up 4.5% year over year. However, the figure was below the Zacks Consensus Estimate of $5.58 billion.
Adjusted total revenue (net of interest expense) came in at $1.39 billion in the quarter, up 2.1% year over year. Additionally, the figure was in line with the Zacks Consensus Estimate.
Regions Financial reported adjusted pre-tax pre-provision income from continuing operations of $488 million, up 2.3% year over year.
On a fully taxable equivalent (FTE) basis, net interest income was $874 million, up 2.1% year over year. Net interest margin (on an FTE basis) expanded 8 basis points (bps) year over year to 3.16% in the quarter.
Regions Financial reported 1.6% growth in non-interest income to $522 million. On an adjusted basis, non-interest income increased 2% from the prior-year quarter, reflecting a rise in almost all components of non-interest income.
Non-interest expense was up 3% year over year to $899 million. On an adjusted basis, non-interest expenses rose 1.9% year over year to $877 million.
Balance Sheet Strength
As of Dec 31, 2016, total loans were up 1.4% year over year to $80.1 billion. Further, total deposits were $99.0 billion, up about 1% from the prior-year quarter. Total funding costs were 30 bps.
As of Dec 31, 2016, low-cost deposits as a percentage of average deposits, were 92.0% compared with 92.4% as of Sep 30, 2016. Further, deposit costs came in at 13 bps in the reported quarter.
Credit Quality: A Mixed Bag; Energy Headwinds Eases
Non-performing assets, as a percentage of loans, foreclosed properties and non-performing loans held for sale, expanded 24 bps from the prior-year quarter to 1.37%. Also, non-accrual loans, excluding loans held for sale, as a percentage of loans, came in at 1.24%, up 28 bps from the year-ago quarter.
Allowance for loan losses as a percentage of loans, net of unearned income was 1.36%, in line with the prior-year quarter. Moreover, provision for loan losses was $48 million, down 30.4% year over year.
However, net charge-offs as a percentage of average loans came in at 0.41%, up 3 bps. Further, the company’s total business services criticized loans climbed 7.1% year over year mainly due to risk rating migration in the energy portfolio.
Strong Capital Position
Regions Financial’s estimated ratios remained well above the regulatory requirements under the Basel III capital rules. As of Dec 31, 2016, Basel III Common Equity Tier 1 ratio (fully phased-in) and Tier 1 capital ratio were estimated at 11.0% and 11.9%, respectively, compared to 10.7% and 11.7% in the prior-year quarter. At the end of the quarter, leverage ratio was 10.1% compared with 10.3% in the year-ago quarter.
During 2016, Regions Financial returned about $1.2 billion as capital to shareholders through dividend payments and common stock repurchases.
Outlook
Rise in interest rates by the Fed in December reduced the amount of the premium amortization on mortgage related securities and is expected to decline further in the first quarter of 2017. If interest rates remain at current levels, or continue to rise, management expects to benefit from marginal declines in premium amortization ultimately achieving a quarterly run rate in the low to mid $30 million range in 2017.
For 2017, Regions expects NII and other financing income growth in the range of 2–4% and adjusted non-interest income is estimated to grow above 3–5%.
Regions projects adjusted expenses to trend from a flat to 1% increase, while efficiency ratio is expected to scale at approximately 62% in 2017. Adjusted operating leverage is expected in the range of 2–4%.
Owing to current global macroeconomic headwinds, management’s plan to curb $300 million of core expenses over the coming three years is on track. Further, encouraged by recent increases in market interest rates, management continues to expect to eliminate additional $100 million by 2019.
Management expects low-single-digit average loan growth and average deposit balance in 2017.
Net charge-offs (NCOs) are estimated at 35–50 basis points for 2017.Direct energy charge-offs are expected to be less than $40 million in 2017, given current market conditions. Should oil prices average below $25 a barrel through the end of 2017, the company is likely to experience additional losses of around $100 million over the next eight quarters.
In addition to share buybacks and dividend payments, management intends to undertake bolt-on fee income acquisitions as a measure of capital deployment.
Notably, the 2017 expectations are based on certain assumptions, including GDP growth of 2–2.5%, projected decline in indirect vehicle loans, expanded fee income opportunities, consistent cost-reduction efforts, average Fed Funds rate of 81 bps and average 10-year Treasury rate of 2.26%. Additionally, the company assumes to remain on track to achieve the target of 150 branch consolidations by the end of 2017.
Management sold affordable housing residential mortgage loans worth $171 million to Freddie Mac during the fourth quarter which recorded a gain of $5 million. About $91 million of these loans included recourse and will remain in loans held for sale at year-end, until the recourse expires later in 2017. Subsequent to the expiration of recourse provisions, it is expected that an additional $5-million gain will be recognized.
The effective tax rate is projected to be in the 30–32% range for 2017.
The company separately provided long-term financial targets, along with strategic initiatives focused on growing and diversifying revenues, expense management and effective capital deployment. Regions anticipates adjusted EPS Compound Annual Growth Rate (CAGR) of 12–15% during the 2016–2018 period, adjusted efficiency ratio of below 60% and adjusted ROATCE in the range of 12–14% by 2018. Furthermore, management targets elimination of core expenses by $400 million by 2019.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed an upward trend in fresh estimates. There have been seven revisions higher for the current quarter compared to two lower. While looking back an additional 30 days, we can see even more upward momentum. There have been nine upward revisions in the last two months.
Regions Financial Corporation Price and Consensus
Regions Financial Corporation Price and Consensus | Regions Financial Corporation Quote
VGM Scores
At this time, Regions Financial's stock has a subpar score of 'D' on both growth and momentum front. However, the stock was allocated a grade of 'B' on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregte VGM Score of 'C'. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for value based on our styles scores.
Outlook
While estimates have been broadly trending upward for the stock, the magnitude of these revisions has been net zero. It comes with little surprise that the stock has a Zacks Rank #2 (Buy). We are expecting an above average return from the stock in the next few months.