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

Key Morningstar Metrics for Regions Financial

• Fair Value Estimate: $20.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: High

What We Thought of Regions Financial’s Earnings

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 the FactSet consensus of $0.58.

That miss was driven by weaker net interest income, or NII, as well as rising expenses. We think this is the more important factor. In the current environment, any weakness in NII is being penalized, and a key uncertainty is when the figure will eventually bottom out. It is now expected that Regions’ NII decline will continue and not bottom out until mid-2024. We originally hoped NII might hit bottom during the current quarter. Regions was the only regional bank under our coverage to revise its outlook for 2023 NII growth downward from last quarter.

Funding costs are the key force behind the negative revision. 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 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 we may lower our fair value estimate of $20 per share by a mid-single-digit percentage. During the recent banking turmoil, Regions’ shares had not suffered as much as those of its peers. With the current selloff, the valuation is still not quite as cheap as some peers’, but it is getting a lot closer.