Key Morningstar metrics for regional financials
What we thought about Regions Financial’s earnings
Regions Financial RF reported worse-than-expected third-quarter results, sending shares down nearly 12% during the trading day. Earnings per share of $0.49 were in line with our expectation of $0.50, but well below the FactSet consensus of $0.58.
The omission was due to weak net interest income or NII as well as rising expenses. We believe this is the more important factor. In the current environment, any weakness in the NII is being punished, and a major uncertainty is when this figure will eventually come down. It is now expected that the region’s NII will continue to decline and will not bottom out until mid-2024. We originally expected NII to bottom during the current quarter. Regions was the only regional bank under our coverage to revise its outlook for 2023 NII growth downward from the previous quarter.
Funding costs are the major force behind the negative revision. Although the sectors still have one of the best deposit bases under our coverage from a total cost perspective, its full cycle deposit beta and overall deposit costs are rising much more than we anticipated. This remains a major uncertainty each quarter, as we have not reached funding balance.
After looking at the data and taking a long-term view, we feel the market is overreacting. While current events will cause us to lower our NII forecast for 2024, we already had net interest margins falling to 3.5% in 2025 and 2026, so these changes don’t lower our full cycle expectations that much.
We don’t see any real stress yet, but we might lower our fair value estimate of $20 per share by a mid-single-digit percentage. During the recent banking turmoil, Regions shares did not suffer as much as its peers. With the current selloff, the valuation is still not as cheap as some peers, but it is getting pretty close.
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The author or authors do not own shares in any securities mentioned in this article. Learn about Morningstar’s editorial policies.
Source: www.morningstar.com
