Regions Revises 2016 Outlook, Aims $400M Cost Cut By 2019

The Birmingham-based financial holding company, Regions Financial Corporation (NYSE:RF) , is likely to witness a rise in revenue in 2016, as inferred from its revised outlook for this year, presented at the Goldman Sachs (NYSE:GS) U.S. Financial Services Conference. In the presentation, the company maintained its expected growth range of 2–4% for net interest income (NII) and other financing. However, it revised the adjusted non-interest income growth projection for 2016 to over 6%.

During the first nine months of 2016, the company’s NII, which constitutes about 62% of the total revenue, grew 3% on a year-over-year basis, while adjusted non-interest income, constituting the remaining, increased 9.1%.

Notably, Regions remains focused on diversifying its revenue streams. In Oct 2016, the company acquired Low Income Housing Tax Credit (LIHTC) corporate fund syndication and asset management businesses from First Sterling Financial, Inc., to expand its fee income base. Last year, the company had acquired BlackArch Partners to reinforce its M&A advisory services and The A.I Group, Inc. to fortify its insurance business.

Regions anticipates adjusted expenses to remain flat or increase modestly. While its adjusted operating leverage is likely to remain in the range of 2–4%, net charge-offs are estimated to lie between 25 and 35 basis points (bps), all in line with the original expectation. However, full-year 2016 efficiency ratio is projected at approximately 63%.

In addition, fourth-quarter 2016 average balances of loans and deposits are expected to remain relatively stable to the fourth-quarter 2015 levels.

The presentation included 2017 expectations as well. Full-year average loan and deposit growth for 2017 are projected at low-single digits. NII and other financing income are expected to grow at 2–4% range, while adjusted non-interest income growth rate projection is 3–5%. Further, adjusted expenses growth forecast lies in the range of 0–1%, while full-year efficiency ratio will likely be around 62%. Adjusted operating leverage may remain between 2–4% and net charge–offs are anticipated in the range of 35–50 bps.

Notably, the 2017 expectations are based on certain assumptions, including GDP growth of 2–2.5%, projected decline in indirect vehicle loans, expanded fee income opportunities, consistent cost-reduction efforts, average Fed Funds rate of 81 bps and average 10-year Treasury rate of 2.26%. Additionally, the company assumes to remain on track to achieve the target of 150 branch consolidations by the end of 2017.

The company separately provided long-term financial targets, along with strategic initiatives focused on growing and diversifying revenues, expense management and effective capital deployment. Regions expects adjusted EPS Compound Annual Growth Rate (CAGR) of 12–15% during the 2016–2018 period, adjusted efficiency ratio of below 60% and adjusted ROATCE in the range of 12–14% by 2018. Further, management targets elimination of core expenses by $400 million by 2019.

We believe that the company’s favorable funding mix, strategic acquisitions and cost containment initiatives will lead to improved performance in the near term. Further, as the U.S. economy is gaining traction, the company is likely to benefit with continued growth in loans and deposits as well as an improving credit quality. However, stringent regulatory landscape might limit the company’s operational flexibility to some extent.

Regions’ shares have gained more than 48% so far this year, outperforming the 35.4% growth for the Zacks categorized Southeast Banks industry. This price performance is backed by an upward Zacks Consensus Estimate revision of 4.8% over the last 60 days for the current year and a resultant Zacks Rank #2 (Buy).

Some better-ranked stocks in the same space include Farmers Capital Bank Corporation (NASDAQ:FFKT) , Access National Corporation (NASDAQ:ANCX) and Carolina Financial Corporation (NASDAQ:CARO) , each sporting a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for the stocks moved up 8.3% to $2.35, 5.1% to $1.65 and 12.9% to $1.58, respectively, over the last 60 days for the current year. You can see the complete list of today’s Zacks #1 Rank stocks here.

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