Regions Earnings: Deposit Pricing and Net Interest Income Continue To Shine

Regions Financial Stock at a Glance

• Fair Value Estimate: $20
• Morningstar Rating: 3 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: None

Regions Financial Earnings Update

No-moat-rated Regions Financial RF reported solid second-quarter results as it handily outperformed our deposit pricing assumptions and continues to show less pricing strain than peers. Earnings per share of $0.59 were in line with FactSet consensus of $0.59 and a bit ahead of our $0.54 estimate.

We’ve long highlighted the deposit base as Regions’ key asset, and this has proved true more than we had even expected, given the pressure the overall industry is experiencing. The bank was able to maintain its outlook for full-year net interest income—a rarity among regional banks this quarter—while the cost of interest-bearing deposits of only 1.33% will be the best under our coverage.

The one negative during the quarter was the increase in expense growth guidance to 6.5% from 4.5%-5.5% for the full year. However, we would not read too much into this, as the increase seems almost entirely driven by one-time charges related to some elevated instances of checking fraud. Given the continued solid performance of the deposit base, steady NII guidance, and what we consider a nonstructural change in expense growth, we don’t expect to make any material changes to our $20 fair value estimate. While we like the fundamental performance of the bank, we think the market recognizes the stability of Regions already, and shares are trading in fairly valued territory.

Regions’ deposit base decreased slightly in the quarter, and management expects some additional attrition in the second half. This will probably put the bank at a full-year decline of 5%, give or take, which shows only slightly more pressure than it expected before March.

Credit remains relatively benign. While certain delinquencies increased, nonperforming loans and net charge-offs were both flat to down in the quarter. The bank continues to expect minimal losses on its commercial real estate office portfolio.