Loan Growth Aids Regions Financial (RF) Despite Cost Hike

Regions Financial Corporation RF is benefiting from a rise in net interest income (NII), supported by high rates and decent loan growth. Its buyouts will also aid growth. The company’s capital deployment activities are backed by strong liquidity. However, pressure on mortgage income due to high rates and a lack of diversification in its loan portfolio are headwinds for Regions Financial. Rising non-interest expenses may impede bottom-line growth.

Regions Financial’s NII witnessed a compound annual growth rate (CAGR) of 8.5% over the last three years (2019-2022), with the uptrend continuing in the first nine months of 2023. The improvement in NII was driven by higher interest rates and solid average loan balance trends, partially offset by higher deposit and funding costs.

Over the past three years (ended 2022), the company’s total loans witnessed a CAGR of 5.2%, with loan balances increasing in third-quarter 2023 from the 2022 end. Given the company’s asset-sensitive balance sheet, high interest rates are expected to support its NII and net interest margin in the upcoming period. However, a rise in deposit costs is likely to affect both in the near term. For 2023, management expects total loans to grow in the low-single-digit range and NII to increase 11%.

Regions Financial is focused on expanding and diversifying its business operations on the back of investments in varied product offerings and through inorganic expansion efforts. In 2021, the company acquired Clearsight, Sabal Capital and EnerBank USA, which diversified its revenue sources. As the company is committed to diversifying its revenue streams and meeting customer needs via diverse services, we believe such endeavors will support its growth prospects in the long term.

Regions Financial has a solid balance sheet and liquidity position. As of Sep 30, 2023, it had long-term borrowings of $4.29 billion, whereas its liquidity sources aggregated $56.8 billion. Given a strong liquidity profile, Regions Financial is less likely to default on interest and debt repayments if the economic situation worsens. Moreover, this supports the company’s capital distribution activities.

In July 2023, the bank announced a 20% increase in its quarterly common stock dividend to 24 cents per share. In April 2022, Regions Financial’s board of directors announced a share repurchase program of up to $2.5 billion of common stock from second-quarter 2022 through fourth-quarter 2024. As of Sep 30, 2023, the company repurchased 725,000 shares for $15 million under this share repurchase plan. Such efforts to enhance shareholder value are encouraging.

However, non-interest expenses witnessed a CAGR of 5.3% over the 2019-2022 period. The rising trend continued in the first nine months of 2023. The rise was majorly due to increases in salaries and employee benefit expenses, and other expenses. Management expects 2023 adjusted non-interest expenses to increase 9.5%. A rising expense base is likely to continue negatively impacting the bottom line in the near term.

Regions Financial’s mortgage income, which is a key component of its non-interest income, witnessed a negative CAGR of 1.5% over the 2019-2022 period, with the declining trend continuing in the first nine months of 2023. Sparse inventories have tanked rapid house price appreciation over the past year, thus wearing down affordability in the market. Moreover, high mortgage rates are likely to continue affecting residential first mortgage loan origination volume and margins in the upcoming period, thereby impeding mortgage income.

Lastly, the majority of Regions Financial’s loan portfolio (57.3% as of Sep 30, 2023) comprises total commercial loans (commercial and industrial lending, as well as commercial real estate lending). The current rapidly changing macroeconomic backdrop and high interest rates may put some strain on commercial lending. Thus, the lack of loan portfolio diversification is likely to hurt the company’s financials if the economic situation worsens.

Over the past year, shares of this Zacks Rank #3 (Hold) company have declined 9.7% against the industry's 5.4% rise.

 

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Bank Stocks Worth a Look

A couple of better-ranked stocks from the banking space are Synovus Financial SNV and Park National PRK.

Earnings estimates for SNV have been revised marginally upward for 2023 over the past 30 days to $4.24. The company’s shares have gained 21.5% over the past six months. SNV currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Park National’s earnings estimates have been unchanged for 2023 over the past 30 days at $8.21. In six months’ time, PRK shares have gained 28.5%. The company carries a Zacks Rank #2 at present.

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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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