Regions Earnings: Loan Portfolio Optimization Still in Progress

Key Morningstar Metrics for Regions Financial

• Fair Value Estimate
  : $30.30
• Morningstar Rating
  : ★★★★
• Morningstar Economic Moat Rating
  : Narrow
• Morningstar Uncertainty Rating
  : Medium

What We Thought of Regions Financial’s Earnings

Regions Financial RF reported slightly disappointing first-quarter results, with net interest income declining 2.6% sequentially. The bank maintained its full-year net interest income outlook of 2.5%-4% growth.

Why it matters: We will not read too much into the 3 basis points of sequential decline in the bank’s net interest margin, as it’s mostly driven by a tighter spread in investment-grade commercial lending rather than by funding-cost pressure.

• Regions has one of the most granular deposit bases in our US banking coverage, with an average customer demand deposit account size of $5,200, much lower than the $16,891 average US checking account balance (WalletHub analysis).
• We still think the bank’s deposit funding costs will benefit from acting as the primary bank for a lot of its customers in its rural deep South footprint. While AI makes it increasingly easy to move cash, the operational deposit and related payment relationships remain valuable to Regions’ clients.

The bottom line: As we incorporate the latest results and updated guidance, we plan to increase our $30.30 fair value estimate for narrow-moat-rated Regions Financial by mid- to high-single digits. The increase in our valuation is primarily driven by a higher leverage ratio forecast resulting from capital relief under newly proposed bank regulations.

• We assess shares as undervalued. We think the market might underestimate the bank as the only banking service provider in some of its rural markets. While deposit competition has always been intense in the metropolitan areas in the Southeast, Regions has very sticky retail deposits in its rural markets.

Key stats: Average loan balances grew by 0.7% sequentially, with growth in commercial loans partially offset by loan optimization efforts in office commercial real estate and trucking. The bank maintained its guidance for average loan growth in the low single digits, in line with our prior expectation of around 1.5%.