Regions (RF) Reports Q2 Loss, Provisions Up on Coronavirus Woes
Regions Financial RF reported second-quarter 2020 adjusted loss of 23 cents per share, as against the earnings of 39 cents per share recorded in the prior-year period. The Zacks Consensus Estimate was pegged at 7 cents.
Net loss available to common shareholders was $237 million compared with the earnings of $374 million reported in the year-ago period.
Results were negatively impacted by higher provisions for credit losses on increasing economic uncertainty due to coronavirus woes. 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 the upswing.
Revenues Increase, Costs Rise
Adjusted total revenues (net of interest expense) came in at $1.54 billion in the reported quarter, outpacing the Zacks Consensus Estimate of $1.45 billion. The revenue figure also increased 6.1% from the year-ago quarter’s reported tally.
Regions Financial recorded adjusted pre-tax pre-provision income from continuing operations of $646 million, up 8% year over year.
On a fully-taxable equivalent (FTE) basis, net interest income was $985 million, up 3%, year over year, riding on loan growth. Notably, higher loans were attributable to the company's equipment finance acquisition, PPP loans and elevated average commercial line draws. Yet, net interest margin (on an FTE basis) contracted 26 basis points (bps) year over year to 3.19% in the June-end quarter.
Non-interest income increased 16% year over year to $573 million. This upsurge mainly resulted from higher capital markets income, mortgage income, securities gains and other income. However, lower card & ATM fees, bank-owned life insurance, service charges on deposit account and commercial credit card income acted as headwinds.
Non-interest expense rose 7.3% year over year to $924 million, mainly due to increase in salaries and employee benefits, net occupancy, professional, legal and regulatory expenses, FDIC insurance assessments, branch consolidation, property and equipment charges, along with other expenses. On an adjusted basis, non-interest expenses were up 4.8% year over year to $898 million.
Adjusted efficiency ratio came in at 57.7% compared with the prior-year quarter’s 58.3%. A lower ratio indicates a rise in profitability.
As of Jun 30, 2020, adjusted total loans climbed 11% sequentially to $90.5 billion. Further, total deposits came in at $110.9 billion, up 15.9%.
As of Jun 30, 2020, low-cost deposits, as a percentage of average deposits, were 94%, compared with the prior-year quarter’s 91%. In addition, deposit costs came in at 14 bps in the June-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 4 bps from the prior-year quarter to 0.93%. Also, non-accrual loans, excluding loans held for sale, as a percentage of loans, came in at 0.68%, expanding 4 bps year over year.
Allowance for loan losses as a percentage of loans, net of unearned income was 2.51%, up 149 bps from the year-earlier quarter. The company’s total business services criticized loans more than doubled on a year-over-year basis.
Furthermore, adjusted net charge-offs, as a percentage of average loans, came in at 0.80%, expanding 36 bps. Provision for loan losses was $882 million, significantly up from the prior-year quarter figure of $92 million.
Solid Capital Position
Regions Financial’s estimated ratios remained well above the regulatory requirements under the Basel III capital rules. As of Jun 30, 2020, Basel III Common Equity Tier 1 ratio (fully phased-in) and Tier 1 capital ratio were estimated at 8.9% and 10.4%, respectively, compared with the 9.9% and 11.1% recorded in the year-earlier quarter.
During the April-June period, Regions did not repurchase shares, though announced $149 million in dividends to common shareholders. Notably, the company has suspended share buybacks through the year-end 2020, following the “unprecedented challenge” from the coronavirus pandemic.
Regions Financial put up a disappointing performance in the April-June quarter on higher provisions. Apart from this, margin pressure is expected to prevail. Also, rise in expenses was a major drag.
Nevertheless, the company’s favorable funding mix, attractive core business and revenue-diversification strategies will likely yield stellar earnings in the upcoming period. Though decline in net interest income is a concern, we are optimistic on the company's branch-consolidation plan and rising fee income.
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
Citigroup C delivered an earnings surprise of 6.4% in the second quarter on robust revenue strength. Earnings per share of 50 cents for the quarter handily outpaced the Zacks Consensus Estimate of 47 cents. Results were, however, down significantly from the prior-year quarter.
Citigroup recorded higher revenues on investment banking and market revenues during the reported quarter. Though equity market revenues disappointed on a more challenging environment in derivatives, and prime finance and securities services revenues declined, fixed income revenues were on an upswing reflecting strength in rates and currencies, spread products and commodities. Moreover, investment banking revenues increased on solid underwriting business, partly muted by lower advisory business. Additionally, fall in expenses was on the upside. However, elevated cost of credit due to the pandemic is a major drag.
A significant improvement in trading and mortgage banking businesses drove JPMorgan’s JPM second-quarter earnings of $1.38 per share. The bottom line surpassed the Zacks Consensus Estimate of $1.34. The results included provision builds due to deterioration in the macro-economic backdrop, bridge book markups and gains related to funding spread tightening on derivatives. Excluding these, earnings per share amounted to $3.27.
Wells Fargo WFC reported second-quarter 2020 loss per share of 66 cents, which chiefly resulted from a reserve build of $8.4 billion for the coronavirus outbreak-related crisis. The Zacks Consensus Estimate for the same was pegged at a loss of 7 cents. Reduced net interest income on lower rates and a disappointing fee income negatively impacted the company’s results. Notably, lower mortgage banking revenues and service charges on deposit accounts were major drags.
Provisions also soared on the coronavirus crisis during the reported quarter. Further, rise in non-interest expenses and a decline in loan balance acted as headwinds.
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