It has been about a month since the last earnings report for Regions Financial (RF - Free Report) . Shares have added about 2.3% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Regions Financial due for a pullback? 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's Q3 Earnings Improve Y/Y, Revenues Escalate
Regions reported third-quarter 2018 earnings of 32 cents per share, up 28% year over year. The Zacks Consensus Estimate was pinned at 36 cents. Results included certain non-recurring items.
Income from continuing operations available to common shareholders was $354 million compared with $296 million reported in the year-ago period.
Notably, net income, including the after-tax gain of $196 million related to the sale of Regions Insurance subsidiary and affiliates during the reported quarter, came in at $548 million or 50 cents per share.
Easing margin pressure and higher revenues were the positive factors. Moreover, credit quality recorded significant improvement. However, lower deposits balance was an undermining factor. In addition, expenses escalated in the reported quarter.
Revenues Improve, Costs Flare Up
Adjusted total revenues (net of interest expense) came in at $1.46 billion in the reported quarter, missing the Zacks Consensus Estimate of $1.47 billion. However, the reported figure climbed 6.4% from the year-ago quarter tally.
Regions Financial reported adjusted pre-tax pre-provision income from continuing operations of $604 million, up 15.5% year over year.
On a fully-taxable equivalent (FTE) basis, net interest income was $955 million, up 3.8% year over year. Net interest margin (on an FTE basis) expanded 14 basis points (bps) year over year to 3.50% in the quarter. Elevated market interest rates and deposit cost management aided the stellar results.
Non-interest income jumped 7.7% to come in at $519 million. Higher capital markets, wealth management income, card & ATM fees, other income and service charges on deposit account primarily led to this rise, partly offset by lower bank-owned life insurance income. Notably, mortgage income remained stable.
Non-interest expense escalated 8.1% year over year to $922 million. On an adjusted basis, non-interest expenses flared up 0.7% year over year to $853 million, mainly due to rise in salaries and employee benefits, outside services, professional, legal and regulatory expenses, credit card costs and other expenses.
As of Sep 30, 2018, adjusted total loans were up 3% year over year to $80.2 billion. Yet, total deposits came in at $93.9 billion, down 3% year over year. Total funding costs came in at 58 basis points (bps).
As of Sep 30, 2018, low-cost deposits, as a percentage of average deposits, were 93% compared with 92.8% as of Sep 30, 2017. In addition, deposit costs came in at 27 bps in the third quarter.
Credit Quality: A Mixed Bag
Non-performing assets, as a percentage of loans, foreclosed properties and non-performing loans held for sale, contracted 30 bps from the prior-year quarter to 0.76%. Also, non-accrual loans, excluding loans held for sale, as a percentage of loans, came in at 0.66%, shrinking 30 bps from the year-ago quarter.
Allowance for loan losses as a percentage of loans, net of unearned income was 1.03%, down 28 bps from the year-earlier quarter. The company’s total business services criticized loans plunged 31.4% year over year.
However, net charge-offs, as a percentage of average loans came in at 0.40%, advancing 2 bps. Provision for loan losses was $84 million, up 10.5% year over year.
Strong Capital Position
Regions Financial’s estimated ratios remained well above the regulatory requirements under the Basel III capital rules. As of Sep 30, 2018, Basel III Common Equity Tier 1 ratio (fully phased-in) and Tier 1 capital ratio were estimated at 10.1% and 11.0%, respectively, compared to 11.2% and 12.1%, recorded in the year-earlier quarter.
During the Jul-Sep quarter, this bank repurchased 30.6 million shares of common stock for a total cost of $581 million and announced $148 million in dividends to common shareholders.
Notably, on Aug 27, 2018, Regions entered into an accelerated share-repurchase agreement to buyback an additional common stock worth $700 million. The final settlement of the transaction is expected to take place this year.
Outlook for 2018
Regions Financial expects adjusted NII and other financing income growth in the range of 5-6%. Current market conditions, recent loan growth, expectation of another rate increase in December and anticipation of a modest increase in deposit costs are likely to result in continuation of recent growth trends in net interest income, and a 3-5 basis point expansion of net interest margin.
Adjusted non-interest income is estimated to grow 4.5-5.5%.
Regions Financial expects adjusted expenses to remain stable in 2018, while efficiency ratio is expected to scale below 60% in 2018. Adjusted operating leverage is projected to at 3.5-4.5%.
Management expects average loans in 2018 to grow in low single digits on a year-over-year basis.
Average deposits are expected to remain relatively stable, excluding brokered and Wealth Institutional Services deposits.
Net charge-offs (NCOs) are estimated at 35-50 bps for 2018. Based on the recent performance and current market conditions, management expects it to be at the lower end of that range.
The effective tax rate is projected at around 21% range for 2018.
For 2018, following the tax-reform changes, adjusted return on average tangible common equity ratio is expected to be nearly 16%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
Currently, Regions Financial has a poor Growth Score of F, however its Momentum Score is doing a lot better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Regions Financial has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.