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Regions Financial (RF) Up 2.5% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Regions Financial (RF - Free Report) . Shares have added about 2.5% in that time frame, underperforming 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 the most recent earnings report in order to get a better handle on the important drivers.

Regions Financial's Q4 Earnings Improve Y/Y, Costs Down

Regions reported fourth-quarter 2018 earnings of 37 cents per share, up 42% year over year. The Zacks Consensus Estimate was pegged at 38 cents. Results included certain non-recurring items.

Income from continuing operations available to common shareholders was $390 million compared with $304 million reported in the year-ago period.

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

For 2018, income from continuing operations available to common shareholders was $1.5 billion compared with $1.2 billion in 2017. Earnings per share from continuing operations were $1.36, up from 98 cents in 2017. Results include certain one-time items. The Zacks Consensus Estimate was $1.44.

Revenues Improve Y/Y, Costs Fall

Adjusted total revenues (net of interest expense) came in at $1.44 billion in the reported quarter, missing the Zacks Consensus Estimate of $1.47 billion. However, the reported figure climbed 1.8% from the year-ago quarter.

Regions Financial reported adjusted pre-tax pre-provision income from continuing operations of $596 million, up 9.6% year over year.

On a fully-taxable equivalent (FTE) basis, net interest income was $971 million, up 4.4% year over year. Net interest margin (on an FTE basis) expanded 18 basis points (bps) to 3.55% in the quarter. Elevated market interest rates led to this upside, partially mitigated by higher deposit costs.

Non-interest income declined 6.8% to $481 million. Lower capital markets, mortgage income, bank-owned life insurance income and other income primarily led to this downside. However, these negatives were partly offset by higher card & ATM fees, service charges on deposit account and wealth management income.

Non-interest expense dropped 7.3% year over year to $853 million. On an adjusted basis, non-interest expenses decreased 3% to $843 million, mainly due to fall in almost all components of expenses, partly offset by higher professional, legal and regulatory expenses, credit card costs and net occupancy expenses.

Balance-Sheet Strength

As of Dec 31, 2018, adjusted total loans were up 1.2% sequentially to $81.2 billion. Yet, total deposits came in at $93.2 billion, down 0.8% sequentially. Total funding costs came in at 69 bps.

As of Dec 31, 2018, low-cost deposits, as a percentage of average deposits, were 92.3% compared with 92.8% as of Dec 31, 2017. In addition, deposit costs came in at 34 bps in the fourth quarter.

Credit Quality: A Mixed Bag

Non-performing assets, as a percentage of loans, foreclosed properties and non-performing loans held for sale, contracted 24 bps from the prior-year quarter to 0.68%. Also, non-accrual loans, excluding loans held for sale, as a percentage of loans, came in at 0.60%, shrinking 21 bps from the year-ago quarter.

Allowance for loan losses as a percentage of loans, net of unearned income was 1.01%, down 16 bps from the year-earlier quarter. The company’s total business services criticized loans slipped 21.7% year over year.

However, adjusted net charge-offs, as a percentage of average loans, came in at 0.46%, advancing 15 bps. Provision for loan losses was $95 million compared with credit provision of $44 million.

Strong Capital Position

Regions Financial’s estimated ratios remained well above the regulatory requirements under the Basel III capital rules. As of Dec 31, 2018, Basel III Common Equity Tier 1 ratio (fully phased-in) and Tier 1 capital ratio were estimated at 9.9% and 10.7%, respectively, compared with 11.1% and 11.9%, recorded a year ago.

During the October-December quarter, Regions Financial repurchased 22 million shares of common stock for a total cost of $370 million and announced $144 million in dividends to common shareholders.

Notably, on Oct 24, 2018, Regions Financial completed an accelerated share-repurchase agreement, which resulted in an additional common stock of 8.75 million, bringing shares repurchased under the agreement to 37.8 million.

Outlook for 2019

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

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

Adjusted 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?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

At this time, Regions Financial has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

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

Outlook

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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