It has been about a month since the last earnings report for Regions Financial (RF - Free Report) . Shares have added about 3.8% 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 the most recent earnings report in order to get a better handle on the important catalysts.
Regions Financial Q1 Earnings Miss, Provisions Up on Coronavirus Woes
Regions Financial reported first-quarter 2020 adjusted earnings of 15 cents per share, missing the Zacks Consensus Estimate of 19 cents. The figure plummeted 59.5%, year over year.
Net income available to common shareholders was $139 million compared with the $378 million reported in the year-ago period.
Results were negatively impacted by lower revenues resulting from a reduction in net interest income on lower rates and a deteriorating fee income. Additionally, elevated provisions were an undermining factor. Yet, lower non-interest expenses were the driving factor. Moreover, rise in loans and deposits reflect a strong capital position.
Revenues Down, Costs Drop
Adjusted total revenues (net of interest expense) came in at $1.41 billion in the reported quarter, lagging the Zacks Consensus Estimate of $1.45 billion. The revenue figure also decreased 2.6% from the year-ago quarter’s reported tally.
Regions Financial recorded adjusted pre-tax pre-provision income from continuing operations of $587 million, down 1.7% year over year.
On a fully-taxable equivalent (FTE) basis, net interest income was $940 million, down 2.2%, year over year. Also, net interest margin (on an FTE basis) contracted 7 basis points (bps) year over year to 3.44% in the first quarter. These declines mainly resulted from lower market-interest rates, partly offset by lower funding costs.
Non-interest income slipped 3.4% to $485 million. This decline mainly resulted from lower card & ATM fees, capital markets income, bank-owned life insurance and other income. Higher mortgage income, service charges on deposit account and wealth management income provided some relief.
Non-interest expense dropped 2.8% year over year to $836 million, mainly due to fall in salaries and employee benefits, net occupancy, professional, legal and regulatory expenses, FDIC insurance assessments, credit card and other expenses. On an adjusted basis, non-interest expenses were down 3.3% year over year to $824 million.
Adjusted efficiency ratio came in at 57.9% compared with the prior-year quarter’s 58.3%. A lower ratio indicates a rise in profitability.
As of Mar 31, 2020, adjusted total loans escalated 6.6% sequentially to $86.5 billion. Further, total deposits came in at $100 billion, up 2.6%.
As of Mar 31, 2020, low-cost deposits, as a percentage of average deposits, were 91%, in line with the prior-year quarter. In addition, deposit costs came in at 35 bps in the March-end quarter.
Credit Quality: A Concern?
Credit metrics deteriorated during the quarter. Non-performing assets, as a percentage of loans, foreclosed properties and non-performing loans held for sale, advanced 8 bps from the prior-year quarter to 0.96%. Also, non-accrual loans, excluding loans held for sale, as a percentage of loans, came in at 0.72%, expanding 10 bps year over year.
Allowance for loan losses as a percentage of loans, net of unearned income was 1.77%, up 76 bps from the year-earlier quarter. The company’s total business services criticized loans climbed 18.9% year over year.
Furthermore, adjusted net charge-offs, as a percentage of average loans, came in at 0.59%, advancing 21 bps. Provision for loan losses was $373 million, up from the prior-year quarter figure of $91 million.
Strong Capital Position
Regions Financial’s estimated ratios remained well above the regulatory requirements under the Basel III capital rules. As of Mar 31, 2020, Basel III Common Equity Tier 1 ratio (fully phased-in) and Tier 1 capital ratio were estimated at 9.4% and 10.6%, respectively, compared with the 9.8% and 10.6% recorded in the year-earlier quarter.
During the January-March period, Regions did not repurchase shares, though announced $149 million in dividends to common shareholders. Notably, the company has temporarily suspended share buybacks through the second quarter of 2020, following the “unprecedented challenge” from the coronavirus pandemic.
Management expects second quarter net interest income and net interest margin to benefit from the Ascentium Capital acquisition. Net interest margin is anticipated at 3.4%.
Excluding Ascentium, a larger, average balance sheet in the near term is anticipated, given increased loan and liquidity needs of customers.
Long-Term Financial Targets (2019-2021)
In three-year period, Regions expects to deliver adjusted return on average tangible common equity of 18-20% by 2021 compared with 15.59% in 2018. Also, adjusted efficiency ratio of 55% or lower is expected, which is below 59.3% reported in 2018. Further, in both the cases, Regions plans to achieve positive operating leverage.
Pillars of Success
Firstly, Regions plans on taking advantage of its existing strength in areas such as customer focus, markets, team, culture and risk management in order to establish presence in key growth markets like Atlanta, Houston and Orlando. Further, it intends to hire professionals such as corporate bankers, wealth management professionals and mortgage loan originators to better serve and meet clients needs.
The company plans to generate funds for these investments with help of its Simplify and Grow continuous improvement approach that it introduced in 2017. These initiatives aim at making banking easier for customers, simplify processes and drive profitable long-term growth.
Further, Regions is making efforts to reduce costs related to third-party spending through strategic sourcing and vendor selectivity. It anticipates annual cumulative savings of nearly $60 million between 2018 and 2021.
Lastly, Regions highlights the importance of technology, and promises to continue driving innovation and expand digital banking capabilities, such as open accounts online, digital loan applications and wealth management digital advisory capabilities.
For the next three years, the company disclosed plans to pilot voice banking capabilities and expand its use of artificial intelligence for both customer-facing and back-office applications. Additionally, Regions is investing in technology to provide serve customers better and enhance credit risk management, as well as a variety of other internal processes across the company.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -50.27% due to these changes.
At this time, Regions Financial has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Regions Financial has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.