Cost Control Aids Regions Financial, Low Fee Income A Woe

Regions Financial Corporation (NYSE:RF) displays mixed prospects for revenue growth. While, cost-saving initiatives are anticipated to support bottom-line growth, lack of diversification in loan portfolio and litigation issues remain concerns.

The company has been focused on controlling costs. Non-interest expenses displayed a negative Compound Annual Growth Rate (CAGR) of nearly 1% over the three-year period (2016-2018), with the trend continuing in the first six months of 2019. The company expects adjusted expenses to be stable or decline slightly in 2019 through consolidation of branches that will help reduce occupancy expenses.

Improved funding mix augurs well, and Regions Financial continues to benefit from lower deposit costs, reduced non-accrual levels and a decline in low-yielding interest earning assets. The bank’s net interest margin (NIM) has displayed an increasing trend for the last few years. It improved in 2016 (3.14%), 2017 (3.33%) and 2018 (3.50%), with support from improvements in deposit and borrowing costs, along with a higher rate environment.

Though the first six months of 2019 witnessed slight contraction of margin due to rise in deposit costs, amid the Fed's accommodative monetary-policy stance, improvement in economy and decent loan growth might further boost support margin.

Regions Financial also remains focused on growth through inorganic routes. For the last few years, the company has been on an acquisition spree in efforts to fortify its diversified business. Notably, the bank continues to take actions with respect to the Simplify and Grow initiative, including streamlining its structure and refining the branch network while making investments in new technologies, delivery channels and other drivers of growth.

Regions Financial has been undertaking initiatives to boost its revenues but muted growth in non-interest income has been straining the bank’s top line for the last few years. Notably, fee income witnessed a negative CAGR of 3.2% for the three years (2016-2018), with the trend continuing in the first two quarters of 2019.

Majority of Region Financial’s loan portfolio — nearly 63% as of Jun 30, 2019 — comprises total commercial loans (commercial and business lending as well as commercial real estate lending). Such high exposure to commercial loans depicts lack of diversification, which can be risky for the company amid challenging economy and competitive markets.

Among other stocks worth considering, First Business Financial Services, Inc. (NASDAQ:FBIZ) , Great Elm Capital Group, Inc. (NASDAQ:GECC) and KKR & Co. Inc. (NYSE:KKR) have been witnessing upward estimate revisions, for the past 60 days.

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First Business Financial Services, Inc. (FBIZ): Free Stock Analysis Report

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