Significantly lower provisions and higher fee revenues drove Regions Financial Corporation’s (RF - Analyst Report) third-quarter 2016 earnings from continuing operations of 24 cents per share, which surpassed the Zacks Consensus Estimate of 21 cents. Also, the figure was 26.3% higher than the prior-year quarter earnings. On an adjusted basis, earnings per share came in at 23 cents.
Better-than-expected results were driven by impressive growth in fee income and a drastic fall in credit cost. Relatively stable net interest income also supported the results. However, these were partially offset by a rise in operating expenses.
Further, the quarter recorded continued growth in deposits and capital position remained strong, while loan balance witnessed a marginal decline. Also, credit quality reflected a mixed bag, while energy sector concerns seem to be easing.
Income from continuing operations available to common shareholders was $303 million, up 23.2% year over year.
Fee Income Improves, Costs Up
Adjusted total revenue (net of interest expense) came in at $1.4 billion in the quarter, up 4.6% year over year. Further, the figure was above the Zacks Consensus Estimate of $1.38 billion.
Regions Financial reported adjusted pre-tax pre-provision income from continuing operations of $467 million, up 9.6% year over year.
On a fully taxable equivalent (FTE) basis, net interest income was $856 million, up marginally from $855 billion in the prior-year quarter. Net interest margin (on an FTE basis) fell 7 basis points (bps) year over year to 3.06% in the quarter.
Regions Financial reported 20.5% growth in non-interest income to $599 million. On an adjusted basis, non-interest income increased 12% from the prior-year quarter, reflecting a rise in capital markets income, card & ATM income, mortgage income and wealth management income.
Non-interest expense was up 4.4% year over year to $934 million and included the impact of a $14 million charge related to the early extinguishment of debt recognized. On an adjusted basis, non-interest expenses rose 2% year over year to $912 million.
Balance Sheet Strength
As of Sep 30, 2016, total loans were down 1% sequentially to $80.9 billion. Further, total deposits were $99.3 billion, up 2.1% from the prior quarter. Total funding costs were 30 bps.
As of Sep 30, 2016, low-cost deposits as a percentage of average deposits were 92.4% compared with 92.5% as of Jun 30, 2016. Further, deposit costs came in at 12 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 33 bps from the prior-year quarter to 1.47%. Also, non-accrual loans, excluding loans held for sale, as a percentage of loans, came in at 1.33%, up 36 bps from the year-ago quarter.
Allowance for loan losses as a percentage of loans, net of unearned income was 1.39%, up 1 bps from the prior-year quarter. Moreover, provision for loan losses was $29 million, down 74.3% year over year.
However, net charge-offs came in at $54 million, down 10% year over year. Further, the company’s total business services criticized loans increased 15% 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 Sep 30, 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 10.8% and 11.7% in the prior-year quarter. At the end of the quarter, leverage ratio was 10.2% compared to 10.4% in the prior-year quarter.
During the quarter, Regions Financial returned about $296 million as capital to shareholders through an $81 million dividend payment and common stock repurchase for $215 million.
Regions’ Financial’s favorable funding mix, attractive core business and revenue diversification strategies will yield profitable earnings in the upcoming quarters. We also remain optimistic on the company's branch consolidation plan and reduction of $300 million in expenses by 2018 to achieve an efficiency ratio below 60%.
Additionally, steady capital deployment measures will continue to boost investor confidence in the stock. However, regulatory issues and margin pressure amid the persistently low interest rate environment are concerns.
Regions Financial currently carries a Zacks Rank #3 (Hold). (You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.)
Performance of Some Major Banks
Driven by improved trading and mortgage banking revenues, JPMorgan Chase & Co.’s (JPM - Analyst Report) third-quarter 2016 earnings easily outpaced the Zacks Consensus Estimate. Improved fixed income and equity trading revenues, higher mortgage banking fees and growth in investment banking income drove the results. However, higher-than-expected rise in provisions hurt results marginally in the quarter.
The PNC Financial Services Group, Inc.’s (PNC - Analyst Report) third-quarter 2016 earnings handily beat the Zacks Consensus Estimate. Better-than-expected results were aided by increased net interest income as well as non-interest income. However, on the downside, the quarter recorded higher expenses and provisions.
Rise in fixed income sales and trading revenue as well as mortgage banking fees drove Bank of America Corporation’s (BAC - Analyst Report) third-quarter 2016 earnings, which surpassed the Zacks Consensus Estimate. However, weakness in equity trading revenues marginally offset these positives.
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