2023-06-12 10:37:52 ET
Summary
- Regions Financial has been given a "buy" rating due to its attractive valuation, price opportunity, capital and liquidity position, product and regional penetration, and benefiting from the current interest rate environment.
- The bank currently offers a 4.33% dividend yield, and its forward P/E is 7.81, over 16% lower than the sector median.
- A potential headwind is its exposure to asset risk, particularly nonperforming loans, charge-offs, and commercial real estate, including offices.
- They have seen NII grow over 30% YoY.
Summary
Regional banks are not down for the count quite yet...
The current market for bank stocks presents value buying opportunities in certain regionals, in my opinion as an analyst, and today I am giving one of them a Buy Rating .
Regions Financial ( RF ) stood out to me for its modestly competitive dividend yield among its peers, attractive valuation, price opportunity, capital and liquidity position, product and regional penetration, and benefiting from the current interest rate environment.
A potential headwind is its exposure to asset risk, particularly nonperforming loans, charge offs, and commercial real estate including offices.
This stock could be added to a portfolio of existing large financial stocks, to provide additional diversification and dividend income, without being overly exposed to the regional banks as the primary makeup of one's portfolio.
Company Brief
Regions Financial is ranked 31st among largest banks in the US, headquartered in Alabama, with its banking subsidiary Regions Bank operating branches in 16 states geographically concentrated in the South and Midwest US.
It is in the business of traditional banking such as personal and small business, as well as commercial, wealth management, investing and retirement solutions, according to its website .
Rating Methodology
This analysis is part of my series for Seeking Alpha focusing on finding value buying opportunities among financial & tech stocks.
I take a holistic approach by assigning a score to each category. The following categories are specific to regional bank stocks that I rate, which now also includes a category for asset risk exposure:
- Dividends: 20 points.
- Valuation: 10 points.
- Price opportunity: 10 points.
- Capital and liquidity: 20 points.
- Impact from Rate Environment: 20 points.
- Product and Geographic Diversification: 10 points.
- Asset Risk Exposure: 10 points.
Then I assign a rating based on the cumulative score.
- Strong Sell: 0 points.
- Sell: 10 to 50 points.
- Hold: 60 to 80 points.
- Buy: 90 points.
- Strong Buy: 100 points.
A Modestly Competitive Dividend Opportunity
The following is taken from dividend info on Seeking Alpha :
This stock currently offers a 4.33% dividend yield , paying $0.20. The most recent ex date of June 1st just passed, however.
Further, the stock has shown steady quarterly payments and dividend growth:
The current rate is a 29% increase from the July 2021 rate.
Now, let's compare with three of its listed regional bank peers , Huntington Banchares ( HBAN ) and M&T Bank ( MTB ).
Huntington offers a yield of 5.66%, while M&T offers a yield of 4.10%, so Regions falls somewhere in the middle of the two with its rate of 4.33%.
All three are higher than another regional bank peer, East West Bancorp ( EWBC ) whose yield stands at 3.64%.
So I think Regions remains modestly competitive with its dividend yield.
This category scores 20 points in my rating.
Still an Attractive Valuation
The following is taken from valuation info on Seeking Alpha :
With a forward P/E of 7.81 , it is currently over 16% lower than the sector median, while its forward P/B stands at 1.05 , just over 6% above the sector median.
For the P/E, I will compare to the S&P 500's median P/E ratio of 14.93 as of May 2023, according to Investopedia . For the P/B ratio, I will compare with the Corporate Finance Institute standard: less than 1.0 could indicate that the stock is undervalued, and greater than 1.0 could mean the stock is overvalued.
In comparing with Regions Financial, the P/E is much lower than the S&P500 median, and the P/B is only slightly higher than the CFI standard of 1.0.
Based on these figures, in the category of valuation this stock scores 10 points.
The Price Opportunity is Still There
The following is the stock's price chart as of Sunday June 11 before the next market open:
Regions Financial - Price chart on Sunday June 11 (StreetSmart Edge trading platform)
What I did in this case study was track the 50 day SMA (dark blue line) vs the 200 day SMA (dark red line) overlaid against the price movement (light blue), and running from Dec 2022 until now.
The death crosses are shown by the red circles, as lagging indicators of bearish price trends, while the golden cross is shown by the blue circle, a lagging indicator of a bullish price trend.
The current death cross has taken a turn but unclear if it will form another golden cross soon. I like this stock in that $17 to $18.50 range, while it remains well below its 200 day SMA.
Based on this chart, I think it shows a price opportunity for now and therefore this category gets a score of 10 points .
A Strong Capital Ratio and Liquidity Position
The following is from the bank's most recent quarterly results presentation:
Regions Financial - quarterly presentation - CET1 ratio (Regions Financial - quarterly earnings presentation)
I see that their CET1 ratios, a vital indicator of capital strength, have grown, and at 9.8% they are still well above the 4.5% standard from Basel III .
Further, their forward-looking sentiment expects it to stay in the 10% range for CET1, and they were able to return capital back to shareholders through dividends, an important metric I already mentioned.
In addition, in terms of liquidity, they had a positive outlook in their quarterly earnings presentation remarks :
Regions does not need to sell securities or loans to generate cash, and has reliable capacity at the FHLB or through the Fed's new Bank Term Lending Facility in addition to cash already on hand.
This category scores 20 points in my rating.
Impact from Rate Environment
The higher interest rate environment has certainly benefited this firm as well.
According to their Q1 results press release this April, "compared to Q1 2022, total revenue increased 22 percent to $2B on both a reported and adjusted basis driven by growth in net interest income."
I want to also highlight the following which shows not only positive NII growth but also strong net interest margin in the most recent quarter:
Regions Financial - quarterly presentation - NII and NIM (Regions Financial - quarterly presentation)
From a forward looking perspective, especially since another Fed meeting is coming up this week, how could that, as well as future meetings this year, impact this bank?
My go to survey for this is the CME Fedwatch tool which tracks the sentiment of interest rate traders. For the June 14th meeting, it shows the target rate is believed to remain the same:
However, what is interesting is that for the July 26th meeting, the majority of rate traders are predicting a rate hike:
Hence, since there is no indication that rates will be lowered soon, I think this environment could continue to benefit bank stocks like Regions, who is very depending on interest income and rate spreads.
This category scores 20 points in my rating.
Balanced Product and Geographic Diversification
Regions CEO John Turner set a positive tone in his quarterly earnings remarks:
Our dedication to prudent risk management and our relationship banking approach have allowed us to build a balanced and diverse business. Even in an uncertain operating environment, executing our strategic plan allows us to be a source of strength for customers and communities.
Let's take a closer look at that business he speaks of...
Regions Financial - quarterly results - revenue by category (Regions Financial)
The above table shows over 39% YoY increase in NII, but I also see a near 11% YoY revenue increase in the wealth management segment, along with increases in the commercial credit fee income and bank owned life insurance.
In terms of regional penetration, this firm is not limited to a tiny state in the American South, but a very large geographic area spanning throughout the Southeast, Midwest, and Southwest, including Texas. Its largest branch and ATM penetration is in Alabama, Florida, Tennessee, and Georgia:
Regions Financial - regional presence (Regions Financial - website)
This is no small market, in my opinion, but also is certainly not in the same category as a Bank of America ( BAC ) or Wells Fargo ( WFC ), nor is it trying to be.
As many of the large banks have well developed retail brokerage and financial advisory businesses along with traditional banking, I am curious to see how Regions does in the financial advisory space, as its website boasts having a financial advisor in every branch, able to help clients with an array of mutual funds, money market funds, annuities, and other products.
As a user of retail brokerage trading tools, I think the non-traditional banking solutions for investors has growth potential, giving clients an opportunity to not just own a checking account but also trade equities and mutual funds, and if needed get the help of an advisor, all tied into the same ecosystem, kind of like the link between Morgan Stanley Bank ( MS ) and its affiliated retail brokerage, E*TRADE. I would like to see Regions do more in the retail brokerage space, which has potential.
This category in my rating earns a score of 10 points .
Asset Risk Exposure
Okay, so after all that positive talk, where is the proverbial "canary in the coal mine" with this firm?
The place I look to for the answer is what kind of asset risk are they exposed to, since this often comes up in the comments from readers and other analysts.
One thing that catches my attention is a steady rise in non-performing loans, over the last year:
Regions Financial - quarterly presentation - NPLs (Regions Financial)
In addition, there has been a rising trend in net charge offs:
Regions Financial - quarterly presentation - net chargeoffs (Regions Financial)
As readers have pointed out, a concern is asset exposure to commercial real estate, particularly office space.
Here is their commercial real estate portfolio breakdown:
Regions Financial - quarterly presentation - CRE portfolio (Regions Financial)
Based on the pie chart, their largest exposure seems to be in apartments, while business offices are at 11.8% of the portfolio.
A recent June 5th article , however, raises the concern of defaults on commercial loans:
More owners of office properties are delinquent on their loans, according to new data from the real estate analytics firm Trepp. The company reports that in May, more than 3.38% of commercial office loans are seriously delinquent - that's up from a year ago.
Therefore, this asset risk of commercial real estate, office space in particular, may have an impact on regional banks like this, as well as the aforementioned unperforming loans and net charge offs. Since it will require longer tracking and analysis of this segment, at this time I will score this category 0 points since it remains an offsetting potential negative to this firm, I think.
Risks to my Outlook
A risk to my bullish outlook is that a potential recession in 2023 can impact credit card volumes, charge offs, defaults, and so on. Higher interest rates can also deter many new homebuyers, which could dampen demand for home loans, impacting the growth in that business. Consider that a March article in CNBC that demand for mortgages was already at a 28 year low even then.
However, the verdict is not fully out yet on recession certainty.
For instance, consider what Goldman Sachs ( GS ) said in a recent June 8th article in Money Magazine :
Goldman Sachs slashed the probability that the U.S. will enter a recession in the next year to 25%. That's down from a 35% forecast in the spring following the failures at Silicon Valley Bank and others.
The investment banking firm lowered the chances of the U.S. sliding into a recession largely because the banking industry has stabilized since March, and a U.S. debt default - which was overall unlikely but nonetheless had the ability to decimate the economy - was averted by a last-minute debt-ceiling deal.
Conclusion
In conclusion, I reiterate my Buy Rating for this stock based on the cumulative score of 90 points in my rating methodology.
Positives are a modestly competitive dividend yield, strong capital and liquidity, product & geographic distribution, price opportunity, valuation.
This is offset by potential asset risk in commercial real estate, as well as a steady rise in non-performing loans and net charge offs over the last year. For this reason, the stock only a Buy and not a Strong Buy at this time.
In closing, I think it is worth giving the regional banks another look, and for undervalued firms with strong fundamentals, a potential spot in one's portfolio of bank stocks. Though the market has given them a beating this year, often times unjustified, some of them have hidden potential that is often undercovered by analysts.
For further details see:
Regions Financial: Still An Undervalued Dividend Opportunity Among Regional Banks