Regions Financial's (RF) Q4 Earnings Improve Y/Y, Costs Down

Regions Financial Corporation (NYSE:RF) reported fourth-quarter 2018 earnings of 37 cents per share, up 42% year over year. The Zacks Consensus Estimate was pinned at 38 cents. Results included certain non-recurring items.

Income from continuing operations available to common shareholders was $390 million compared with $304 million reported in the year-ago period.

Easing margin pressure, lower expenses and higher revenues were the positive factors. Moreover, credit quality recorded significant improvement to a great extent. However, lower deposits balance was an undermining factor. In addition, lower fee income, backed by reduced capital markets and mortgage banking income, were major drags.

For 2018, income from continuing operations available to common shareholders was $1.5 billion compared with $1.2 billion in 2017. Earnings per share from continuing operations were $1.36, up from 98 cents in 2017. Results include certain one-time items. The Zacks Consensus Estimate was $1.44.

Revenues Improve Y/Y, Costs Fall

Adjusted total revenues (net of interest expense) came in at $1.44 billion in the reported quarter, missing the Zacks Consensus Estimate of $1.47 billion. However, the reported figure climbed 1.8% from the year-ago quarter tally.

Regions Financial reported adjusted pre-tax pre-provision income from continuing operations of $596 million, up 9.6% year over year.

On a fully-taxable equivalent (FTE) basis, net interest income was $971 million, up 4.4% year over year. Net interest margin (on an FTE basis) expanded 18 basis points (bps) year over year to 3.55% in the quarter. Elevated market interest rates led to this upside, partially mitigated by higher deposit costs.

Non-interest income declined 6.8% to come in at $481 million. Lower capital markets, mortgage income, bank-owned life insurance income and other income primarily led to this downside. However, these negatives were partly offset by higher card & ATM fees, service charges on deposit account and wealth management income.

Non-interest expense dropped 7.3% year over year to $853 million. On an adjusted basis, non-interest expenses decreased 3% year over year to $843 million, mainly due to fall in almost all components of expenses, partly offset by higher professional, legal and regulatory expenses, credit card costs and net occupancy expenses.

Balance-Sheet Strength

As of Dec 31, 2018, adjusted total loans were up 1.2% sequentially to $81.2 billion. Yet, total deposits came in at $93.2 billion, down 0.8% sequentially. Total funding costs came in at 69 basis points (bps).

As of Dec 31, 2018, low-cost deposits, as a percentage of average deposits, were 92.3% compared with 92.8% as of Dec 31, 2017. In addition, deposit costs came in at 34 bps in the fourth quarter.

Credit Quality: A Mixed Bag

Non-performing assets, as a percentage of loans, foreclosed properties and non-performing loans held for sale, contracted 24 bps from the prior-year quarter to 0.68%. Also, non-accrual loans, excluding loans held for sale, as a percentage of loans, came in at 0.60%, shrinking 21 bps from the year-ago quarter.

Allowance for loan losses as a percentage of loans, net of unearned income was 1.01%, down 16 bps from the year-earlier quarter. The company’s total business services criticized loans slipped 21.7% year over year.

However, adjusted net charge-offs, as a percentage of average loans came in at 0.46%, advancing 15 bps. Provision for loan losses was $95 million compared with credit provision of $44 million.

Strong Capital Position

Regions Financial’s estimated ratios remained well above the regulatory requirements under the Basel III capital rules. As of Dec 31, 2018, Basel III Common Equity Tier 1 ratio (fully phased-in) and Tier 1 capital ratio were estimated at 9.9% and 10.7%, respectively, compared to 11.1% and 11.9%, recorded in the year-earlier quarter.

During the Oct-Dec quarter, Regions repurchased 22 million shares of common stock for a total cost of $370 million and announced $144 million in dividends to common shareholders.

Notably, on Oct 24, 2018, Regions completed an accelerated share-repurchase agreement, which resulted in an additional common stock of 8.75 million, bringing shares repurchased under the agreement to 37.8 million.

Our Viewpoint

Regions Financial reported a decent quarter, marked by top-line strength, reduced expenses and improved credit quality to an extent. The company’s favorable funding mix, attractive core business and revenue-diversification strategies will likely yield profitable earnings in the upcoming quarters.

Though decline in deposits and loan growth at a sluggish pace pose concerns, we remain optimistic on the company's branch-consolidation plan and reduction of $400-million expenses by 2019.

Currently, Regions Financial carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other banks

Riding on higher revenues, U.S. Bancorp’s (NYSE:USB) fourth-quarter 2018 adjusted earnings per share of $1.07 outpaced the Zacks Consensus Estimate by a penny. Results were also up 10.3% from the prior-year quarter. Higher revenues, along with loan and deposit growth, were the driving factors. Though lower mortgage banking revenues, along with escalating expenses and provisions disappointed, easing margin pressure on rising rates and overall higher fee income acted as tailwinds.

Dismal fixed income trading and underwriting business performance affected JPMorgan’s (NYSE:JPM) fourth-quarter 2018 earnings of $1.98 per share, which lagged the Zacks Consensus Estimate of $2.20. However, the figure surged 85% from the prior-year quarter.

Citigroup (NYSE:C) kick-started the earnings season and delivered a positive earnings surprise of 3.9% in fourth-quarter 2018, backed by expense control and lower cost of credit. Adjusted net income per share of $1.61 for the quarter handily outpaced the Zacks Consensus Estimate of $1.55. Also, adjusted earnings climbed 26% year over year.

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