Regions (RF) Q3 Earnings Beat Estimates on Higher Revenues
Regions Financial RF reported third-quarter 2020 adjusted earnings of 49 cents per share, surpassing the Zacks Consensus Estimate of 34 cents. Also, results compare favorably with the prior-year period earnings of 39 cents.
Results were driven by higher revenues on increases in both net interest income (NII) and fee income. Moreover, rise in deposit balances provided some respite. Notably, mortgage income and capital markets income were on an upswing. However, higher provisions for credit losses and rise in expenses were undermining factors.
Including certain one-time items, net income available to common shareholders was $501 million or 52 cents per share compared with the earnings of $385 million or 39 cents reported in the year-ago period.
Revenues Increase, Costs Rise
Adjusted total revenues (net of interest expense) came in at $1.6 billion in the reported quarter, outpacing the Zacks Consensus Estimate of $1.5 billion. The revenue figure also increased 6.8% from the year-ago quarter’s reported tally.
Regions Financial recorded adjusted pre-tax pre-provision income from continuing operations of $707 million, up 12.4% year over year.
On a fully-taxable equivalent (FTE) basis, net interest income was $1 billion, up 5.3%, year over year, riding on loan growth. Notably, higher loans were attributable to the company's Ascentium Capital equipment finance acquisition, Paycheck Payment Program (PPP) loans and robust mortgage production, along with solid deposit growth.
Yet, net interest margin (on an FTE basis) contracted 31 basis points (bps) year over year to 3.13% during the September-end quarter. Higher liquidity in the form of lower-returning assets, such as excess cash, held at the Federal Reserve and PPP loans hurt margin to an extent.
Non-interest income increased 17.4% year over year to $655 million. This upsurge mainly resulted from higher capital markets income, mortgage income, commercial credit card income, securities gains and wealth management income. Nonetheless, lower bank-owned life insurance, service charges on deposit account and other income acted as headwinds.
Non-interest expense rose 2.9% year over year to $896 million, mainly due to rise in salaries and employee benefits, furniture and equipment, along with professional, legal and regulatory expenses, partly offset by lower FDIC insurance assessments, outside services, credit expenses, branch consolidation, property and equipment charges, along with other expenses. On an adjusted basis, non-interest expenses were up 2.8% year over year to $889 million.
Adjusted efficiency ratio came in at 55.3% compared with the prior-year quarter’s 57.4%. A lower ratio indicates a rise in profitability.
As of Sep 30, 2020, adjusted total loans declined 2.4% sequentially to $88.4 billion. Yet, total deposits came in at $118.4 billion, up 1.4%.
As of Sep 30, 2020, low-cost deposits, as a percentage of average deposits, were 95%, compared with the prior-year quarter’s 92%. In addition, deposit costs came in at 11 bps in the July-September quarter.
Credit Quality: A Concern?
Credit metrics deteriorated during the third quarter. Non-performing assets, as a percentage of loans, foreclosed properties and non-performing loans held for sale, advanced 25 bps from the prior-year quarter to 0.90%. Also, non-accrual loans, excluding loans held for sale, as a percentage of loans, came in at 0.87%, expanding 31 bps year over year.
Allowance for loan losses as a percentage of loans, net of unearned income was 2.58%, up 153 bps from the year-earlier quarter. The company’s total business services criticized loans surged 60.9% on a year-over-year basis.
Furthermore, adjusted net charge-offs, as a percentage of average loans, came in at 0.50%, expanding 6 bps. Provision for loan losses was $113 million, up 4.6% from the prior-year quarter figure of $108 million.
Solid Capital Position
Regions Financial’s estimated ratios remained well above the regulatory requirements under the Basel III capital rules. As of Sep 30, 2020, Basel III Common Equity Tier 1 ratio (fully phased-in) and Tier 1 capital ratio were estimated at 9.3% and 10.8%, respectively, compared with the 9.6% and 10.8% recorded in the year-earlier quarter.
During the July-September period, the bank did not repurchase shares, but announced $149 million in dividends to common shareholders.
Regions Financial put up an impressive performance during the July-September quarter on higher revenues. The company’s favorable funding mix, attractive core business and revenue-diversification strategies will likely yield stellar earnings in the upcoming period as well.
Though rise in expenses is a concern, we are optimistic on the company's branch-consolidation plan and rising fee income. Nevertheless, margin pressure is expected to prevail. Also, higher provisions remain a concern.
Regions Financial Corporation Price, Consensus and EPS Surprise
Currently, Regions Financial carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Performance of Mega Banks
U.S. Bancorp’s USB reported third-quarter earnings per share of 99 cents, which beat the Zacks Consensus Estimate of 93 cents. However, the bottom line compared unfavorably with the $1.15 reported in the prior-year quarter. Fee income growth aided by higher mortgage banking, corporate bond issuance fees and trading activities was recorded. Furthermore, capital position remained strong and deposit balances increased. Nevertheless, a substantial rise in provisions, due to the coronavirus outbreak-related concerns, was a headwind. Moreover, higher expenses and contraction of margin were undermining factors.
PNC Financial PNC pulled off an earnings surprise of 62% on prudent expense management during the September-end quarter. Earnings per share of $3.39 surpassed the Zacks Consensus Estimate of $2.09. The figure also came in 15% higher than the prior-year level. Decline in expenses and lower provisions drove the results. Apart from this, a decent fee income aided revenue growth. However, a lower net interest margin and decrease in loans were undermining factors.
Aided by robust mortgage banking revenues, Wells Fargo WFC reported third-quarter adjusted earnings of 56 cents per share, beating the Zacks Consensus Estimate of 47 cents. Results, however, compared unfavorably with the prior-year quarter figure of 92 cents. Including certain adjustments, net income came in at $2.04 billion or 42 cents per share.
Increased gains on trading activities also supported the bank. In addition, the company reflects prudent expense management. Further, high loans and deposits balance displayed a strong capital position. Yet, reduced net interest income on lower rates negatively impacted the company’s results. Provisions also soared during the reported quarter.
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