Regions Financial (RF) Q3 Earnings: What's In Store?

Regions Financial Corporation (NYSE:RF) is scheduled to report third-quarter 2016 results on Oct 18.

Regions’ second-quarter 2016 earnings from continuing operations was in line with the Zacks Consensus Estimate and stable year over year. Results reflected continued execution of the bank’s branch network optimization and cost-reduction initiatives. Higher net interest income and lower expenses were offset by reduced non-interest income and increased provisions. The quarter witnessed consistent growth in loans and deposits.

Interestingly, Regions delivered positive earnings surprises in two of the trailing four quarters with an average earnings beat of 2.70%. Regarding the stock’s performance, Regions has gained more than 12% over the last three months.

REGIONS FINL CP Price and EPS Surprise

REGIONS FINL CP Price and EPS Surprise | REGIONS FINL CP Quote

Will the upcoming earnings release give a further boost to Regions’ stock? Notably, our quantitative model doesn’t call for an earnings beat this time around.

Here is what our model indicates:

A stock needs to have the right combination of the two key criteria – a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) – for increasing chances of an earnings beat.

Unfortunately, this is not the case here, as elaborated below.

Zacks ESP: The Earnings ESP for Regions is 0.00%. This is because both the Most Accurate Estimate and the Zacks Consensus Estimate stand at 21 cents.

Zacks Rank: Regions’ Zacks Rank #3 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of a positive earnings surprise

Factors to Influence Q3 Results

Fee Income Strength to Support Revenue: Non-interest income might get a lift owing to Regions’ initiatives to expand its several capabilities, including capital market, treasury management and insurance. In the last quarter’s conference call, management had stated that it also intends to continue exploring and assess opportunities for expansion of its mortgage servicing portfolio. It remained optimistic on mortgage business which is usually seasonally strong in the third quarters of the year.

Muted Loan Growth: According to recent data from the Federal Reserve, commercial and industrial loans across the industry were flat during the quarter compared with second-quarter 2016. This may have kept the overall loan growth subdued. As steady loan growth was one of the major ways to offset margin pressure for several banks, including Regions, in the last few quarters, third-quarter results might reflect considerable pressure on net interest income.

Continued Pressure on Net Interest Margin (NIM): Management expects NIM will likely experience a modest pressure and decline 4–6 bps for second-half of the year. As the Fed did not take any step in raising the interest rates further, we believe that the company is not likely to record an improvement in its net NIM in the quarter.

Expense to Trend Higher: Expenses might trend upward in the upcoming release given the company’s continued investments tied with revenue initiatives. Further, management expects FDIC fees to increase around $5 million on a quarterly basis beginning third-quarter 2016. Therefore, in the third quarter FDIC run rate will be in the $27–$30 million range. However, cost pressure should be offset to some extent as the company remains focused on expense management with its long-term goal to reduce $300 million of core expenses.

Stable credit quality with reduced energy allowances: Management expects that given its credit trends and fluctuating commodity prices, certain credit metrics may experience volatility. However, given the rebound in oil prices that hit rock bottom in February, the allowances tied with energy portfolio should not be significant.

Stocks That Warrant a Look

Here are some stocks worth considering, as they have the right combination of elements to post an earnings beat this quarter.

Synovus Financial Corp. (NYSE:SNV) has an Earnings ESP of +2.00% and carries a Zacks Rank #3. It is scheduled to report results on Oct 18. You can see the complete list of today’s Zacks #1 Rank stocks here.

BlackRock, Inc. (NYSE:BLK) has an Earnings ESP of +0.60% and carries a Zacks Rank #2. The company is slated to release results on Oct 18.

Raymond James Financial, Inc. (NYSE:RJF) has an Earnings ESP of +2.04% and carries a Zacks Rank #2. The company is slated to release results on Oct 26.

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