We have upgraded our recommendation on
Regions Financial Corp.
) to Outperform from Neutral based on its improving credit quality
and the repayment of the bailout money. Moreover, we believe that
the company is well positioned to benefit from de-risking of the
balance-sheet and cost-control measures it undertook. However,
regulatory issues remain a major area of concern.
Regions is expected to announce its third-quarter results on
October 23. The Zacks Consensus Estimate earnings per share for the
quarter is 20 cents on revenue expectation of $1.36 billion.
Regions has surpassed the Zacks Consensus Estimate in the last four
Regions qualified the stress test in March, 2012. Following the
Federal Reserve's approval, it also cleared-off its Troubled Asset
Relief Program (TARP) dues in April this year. Further, in May, the
company completed the buyback of warrants issued to the Treasury as
part of the company's participation in TARP. TARP repayment removed
the restrictions on the company's financial flexibility. Moreover,
the company's well-capitalized financial position is a positive.
Further, with the improvements in its loan loss performance and
profitability, the major rating agencies upgraded their outlook to
reflect that Regions had decreased its risk concentrations and is
showing signs of stability in its asset quality. The aforementioned
actions boost investors' confidence in the company to a great
Moreover, Regions continued to de-risk its portfolio through the
liquidation of problem assets and foreclosed properties. With such
initiatives, overall credit trends are anticipated to improve and
nonperforming assets are expected to decrease as the year
Further, the company is focused on strengthening its core
franchise through productivity and efficiency initiatives. Looking
ahead, management anticipates overall 2012 expenses from continuing
operations, excluding goodwill impairment, to decline from the 2011
level due to continued and disciplined focus on cost control.
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On the flip side, the regulatory environment has become more
stringent for the U.S. banks. Further, the current market
volatility and limited credit availability could continue to
adversely affect the U.S. banking industry and the global economies
in the foreseeable future.
Moreover, the Fed's newly announced rules suggest that banks would
need to maintain minimum tier 1 capital ratio of 7.0% of
risk-weighted assets, which is well above the current requirement
of around 2%. These rules might limit the flexibility of the banks
with respect to their investments and lending volumes.
Regions currently retain a Zacks #2 Rank, which translates into a
short-term Buy rating. However, one of its peers,
First Horizon National Corporation
) retains a Zacks #3 Rank (short-term Hold rating).