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Fee Income to Support Regions (RF) Q3 Earnings Amid Low Rates

Regions Financial RF is scheduled to report third-quarter 2020 results on Oct 20, before the opening bell. The bank’s results are estimated to reflect a year-over-year decline in earnings, while revenues are expected to rise.

This Birmingham, AL-based company’s second-quarter 2020 earnings missed the Zacks Consensus Estimate. Results were negatively impacted by higher provisions for credit losses on the heightening economic uncertainty due to the coronavirus crisis. Moreover, rise in expenses is a major drag. However, higher revenues aided by rising loans and deposit balances provided some respite. Notably, mortgage income and capital markets income was on an upswing.

Markedly, Regions has a disappointing earnings surprise history. The company's results surpassed the consensus estimate in one of the trailing four quarters, came in line in one, and missed in the other two, the average negative surprise being 111.77%.

Additionally, the bank’s activities in the to-be-reported quarter were adequate to win analysts’ confidence. As a result, its Zacks Consensus Estimate for quarterly earnings has been revised upward in the last seven days. However, earnings are expected to record a year-over-year slump of 12.8%. Yet, the Zacks Consensus Estimate of $1.5 billion for sales indicates a 0.2% increase from the prior-year quarter.
 

Regions Financial Corporation Price and EPS Surprise

Regions Financial Corporation Price and EPS Surprise

Regions Financial Corporation price-eps-surprise | Regions Financial Corporation Quote

Now let’s discuss the factors that are likely to have impacted the company’s third-quarter performance:

 

Factors at Play

Low Net Interest Income: The overall lending scenario remained soft during the July-September quarter, with commercial real estate loan portfolios having offered significant support. Conversely, revolving home equity and consumer loans, along with commercial and industrial (C&I), were hit hard.

With the central bank cutting interest rates to near zero in March to support the U.S. economy, Regions’ net interest margin and net interest income (NII) are likely to have been continually affected. Nonetheless, low deposit costs and higher average interest earning assets might have been offsetting factors.

Management expects third-quarter NII to decline 1.5-2.5% sequentially, mostly from the normalization of line activity that was elevated in the second quarter. Excluding loans under Paycheck Protection Program and excess cash liquidity, core net interest margin is estimated to be in mid-to-high 330 basis points (bps).

The Zacks Consensus Estimate of $122.5 billion for average interest earning assets calls for an 11.9% year-over-year improvement during the quarter under review, while the NII is expected to improve 2.1% to $970 million.

Non-Interest Revenues: The third quarter witnessed continued strength in equity markets, boosting market-driven revenues. Wealth, trust, trading and asset management revenues are anticipated to have recorded high numbers. As initial fee waivers begin to expire, a rebound in deposit service charges, though at a slower pace, is likely to have been witnessed.

In addition, card fees are anticipated to have been supported by improved consumer spending during the quarter in discussion. The Zacks Consensus Estimate for card and ATM fees is pegged at $105 million, suggesting a rise of 4% sequentially. In addition, the Federal Reserve’s accommodative monetary policy and decline in mortgage rates during the September-end quarter drove refinancing activities, while growth in new originations was also impressive.

Further, fixed income trading revenues are likely to have increased owing to a rise in client activity on volatile markets.

Management expects mortgage to be strong for the remainder of the year. Also, on assumption that the current level of spending persists, management expects consumer service charges and card & ATM fees to be down $10-$15 million per month from pre-March levels.

Remarkably, the Zacks Consensus Estimate for capital market revenues is pinned at $47.5 million, suggesting a 31.9% jump year over year, while commercial credit fee income is projected to be down 10.5% to $17 million.

Stable Expenses: The bottom line will likely reflect Regions’ efficient expense management during the quarter to be reported. The company intends to keep expenses stable while investing in revenue-generating areas.

Asset Quality: Management does not anticipate substantial reserve builds throughout the remainder of 2020. Also, net charge-off levels for the remainder of the year will likely be consistent with the June-end quarter.

Here is what our quantitative model predicts:

Regions has the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Regions is +3.31%.

Zacks Rank: Regions currently carries a Zacks Rank of 3, which increases the predictive power of ESP.

Other Banks Worth a Look

Here are a few bank stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around:

The Earnings ESP for CullenFrost Bankers, Inc. CFR is +2.61% and the stock carries a Zacks Rank of 3, at present. The company is slated to report third-quarter numbers on Oct 29. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Huntington Bancshares Incorporated HBAN is set to release earnings figures on Oct 22. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +2.88%.

BankUnited, Inc. BKU is scheduled to release quarterly results on Oct 28. The company has an Earnings ESP of +6.4% and currently carries a Zacks Rank of 3.

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Regions Financial Corporation (RF): Free Stock Analysis Report
 
Huntington Bancshares Incorporated (HBAN): Free Stock Analysis Report
 
BankUnited, Inc. (BKU): Free Stock Analysis Report
 
CullenFrost Bankers, Inc. (CFR): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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