We maintain our Neutral recommendation on Regions Financial Corp.(RF) based on the steady profit trend of the company in the first quarter of 2011.
In April, Regions reported first-quarter 2011 earnings of 1 cent per share, substantially better than the Zacks Consensus Estimate of a loss of 9 cents per share. This also compared favorably with a loss of 21 cents per share in the year-ago quarter, but unfavorably with earnings of 3 cents per share reported in the prior quarter. Quarterly results also represent back-to-back profits after incurring losses since the second quarter of 2009.
Strong core business performance, better credit trends, growing customers and continued expansion in net interest margin primarily led to the impressive results. A decrease in non-interest expenses also supported better-than-expected results. However, sequential decline in non-interest revenues was the downside.
Regions is working hard to increase profitable quality loans outstanding. The company is actively engaged in de-risking the most stressful portfolio segments. In the first quarter of 2011, investor commercial estate loans were reduced by $1.1 billion. Further, for the fifth consecutive quarter, criticized and classified problem loans dropped and plummeted approximately $700 million from the fourth quarter levels. Moreover, the de-risking strategy and customer deleveraging will keep the overall outstanding loan portfolio balances under pressure for the remainder of 2011. In the near term, lending revenues will be under pressure, but Regions’ efforts to improve pricing and production of new loans will offset the impact of de-risking and deleveraging.
After declining since the second quarter of 2006, the Net Interest Margin (NIM) at Regions is showing signs of improvement. NIM improved to 3.07% from 3.00% in prior quarter. The improvement in NIM was attributable to management’s actions taken regarding loan and low cost deposit. Moreover, given the asset sensitive balance sheet, NIM is expected to benefit positively with an increase in interest rate during the second half of 2011.
In spite of volatile environment, Regions witnessed a year-over-year first quarter growth in virtually all fee-based businesses. The company is encouraged by slow but an improving economic environment in the first quarter of 2011 and is working hard on appropriate strategies to capitalize on revenue growth opportunities, while continuing to limit operating expenses and eliminate non-essential spending.
At current level, Regions must remain meticulous in its efforts to manage expenses. The company remains focused on strengthening its core franchise through productivity and efficiency initiatives. It has reduced headcount over 3,000 positions in the last 2 years. Therefore, Regions will continue to downsize the franchise, constraining expense growth without sacrificing investment opportunities. Moreover, we expect core non-interest expenses in 2011 to be slightly down from 2010 level.
On the flip side, an unusually high recession and credit related costs such as higher other real estate owned, professional fees and FDIC premiums at least till 2010, more than offset its cost control measures. FDIC premiums decreased by $7 million in the first quarter of 2011 on a year-over-year basis, reflecting Regions’ decision to exit the Transaction Account Guaranty Program on July 1, 2010. In February 2011, FDIC adopted a final rule to revise the deposit insurance assessment system for large institutions, which is expected to result in an increase in FDIC expense beginning in the second quarter of 2011. Any such increase may adversely affect the business, financial condition or results of operations.
Though Regions is encouraged by signs of economic recovery, improving credit quality metrics, and continued success in customer base expansion in most of the markets, its southeastern economy is recovering at a slower space, particularly in Florida, where housing remains a serious concern and unemployment continues to persistently soar.
Earlier this week, Regions Bank, a unit of Regions has announced a definitive agreement to acquire the credit card portfolio of $1 billion from FIA Card Services, a subsidiary of Bank of America Corporation (BAC). The financial terms of the deal were not disclosed. Regions will purchase approximately 500,000 customer accounts, comprising existing Regions' customers, for an undisclosed amount. The deal is expected to close during the second quarter of 2011.
The contract will help Regions in bringing greater balance and diversity into its business and open up better opportunities to meet customers’ borrowing needs more efficiently. Nevertheless, the favorable funding mix, improved core business performance, the company’s expansion mode along with its strategies will continue to yield profitable earnings in the upcoming quarters.
Regions currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
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