Regions Financial Earnings: Market May Be Overreacting to Net Interest Income Headwinds

No-moat Regions Financial RF reported worse-than-expected third-quarter results, causing shares to fall roughly 12% during the trading day. Earnings per share of $0.49 were in line with our $0.50 expectation but came in considerably lower than FactSet consensus of $0.58.

The miss compared with consensus was driven by weaker net interest income, or NII, and rising expenses. We think the most important factor is not the third-quarter miss, but rather the weakening NII outlook. In the current environment, any weakness in NII is being penalized, and a key uncertainty is when NII will eventually bottom out. For Regions, it is now expected that the NII decline will continue, and it won’t bottom out until mid-2024. We had originally hoped that NII might hit bottom during the current quarter. And Regions was the only regional bank under our coverage to revise its outlook for 2023 NII growth downward from last quarter.

The key force behind the negative revision is funding costs. Although Regions still has one of the best deposit bases under our coverage from a total cost perspective, its through-the-cycle deposit beta and overall deposit costs are rising more than we had predicted. This remains a key uncertainty each quarter as we have not quite reached a funding equilibrium.

After crunching the numbers and taking a longer-term view, we think the market may be overreacting. While current events will cause us to lower our NII forecast for 2024, we already had net interest margins dropping to 3.5% in 2025 and 2026, so these changes do not throw off our through-the-cycle expectations all that much. We do not see any real stress just yet, but do expect to potentially lower our $20 per share fair value estimate by a mid-single-digit percentage. During the recent banking turmoil, Regions’ shares had not suffered as much as peers such that the shares never got that cheap. With the current selloff, the valuation is still not quite as cheap as some peers but is getting a lot closer.