RF - Regions Financial

[sswan11]

Positive writeup in this week's Barron's:

 

http://online.barrons.com/news/articles/SB50001424053111903843804579529781981163924

 

Regions Financial: Pouring On the Southern Charm

Regions Financial has rebounded smartly from the credit crisis of five years ago. With the economy in its key markets finally turning, the bank's shares are looking cheap.

 

By LAWRENCE C. STRAUSS

May 3, 2014

It's been a long road back from the financial crisis for Regions Financial.

 

Based in Birmingham, Ala., and stretching across 16 states, the banking company (ticker: RF) took a beating as commercial real-estate loans soured. It posted serious net losses from 2008 through 2011. Its stock got shredded like a magnolia blossom in a hurricane, falling from $38 to $2.50.

 

Regions, the nation's 21st largest bank, is now staging an impressive comeback. It has cleaned up its problem loans, cut costs, and increased its presence in some thriving sectors of business lending. It is also making smart moves in the booming fields of mobile banking and wealth management.

 

 

Headquartered in Birmingham, Ala., the bank is poised for solid growth in the years ahead. Photo: Courtesy of Regions Financial

Result: The stock has risen to about $10, after edging out the broad market in the past year with a 21% gain. But the shares still have room to run—they trade at less than 90% of book value, versus 130% for Regions' peer group. John Crowley, a portfolio manager of the Eaton Vance Large Cap Value Fund, figures the shares are worth more than $13 apiece, some 30% above the current level.

 

Regions Financial, with a market value of $14.5 billion, was created from a series of banking mergers in the South, Midwest, and Texas. Founded in 1971, it went on to absorb such Southern stalwarts as Union Planters Bank and AmSouth Bank.

 

The current CEO, Grayson Hall, took charge four years ago and has ably led the turnaround. A 56-year-old lifer at Regions, Hall has focused on strengthening the balance sheet and streamlining operations. He's trimmed the branch network to 1,673 from a peak of 2,087 in mid-2007. And in 2012 he sold off brokerage firm Morgan Keegan to Raymond James Financial for $1.2 billion, using the proceeds to help pay back $3.5 billion in government bailout funds.

 

 

"We are much stronger and much more diversified today, with less reliance on commercial real estate," Hall says.

 

Hall moved decisively on problem loans, writing off losers and toughening lending standards. Charge-offs of bad loans fell to just 0.44% of the loan portfolio in the first quarter, less than half the level of a year earlier. As a result, Regions has been able to chop its allowance for loan losses by nearly 30% during the past year, to $1.3 billion. That has helped earnings growth, which should clock in at 5% or 6% this year and next.

 

Recent Price $10.21

12-Month Change 21%

Market Value (bil) $14.5

EPS 2014E $0.86

EPS 2015E $0.91

P/E 2015E 11.2

Dividend Yield 2%

E=Estimate

Source: Bloomberg

Yes, there have been some hiccups. Regions' first-quarter profits from continuing operations came in at 21 cents a share, off two cents from last year, partly because of a drop in mortgage-lending fees as a wave of refinancings ran its course. The good news: Regions isn't especially dependent on mortgages—they account for only 16% of its loans, lower than the level at a number of peers.

 

Regions focuses its lending on commercial and industrial loans, and on that front the trends are encouraging. These holdings hit $30 billion in the first quarter, up 11% from a year earlier, after Hall hired more loan officers for attractive industries like energy and health care. Regions figures its total loan portfolio, about $76 billion, can grow 3% to 5% this year, a target that may well prove conservative.

 

Regions' profitability is also on the rise. The bank's net-interest margin, an indication of the income from its assets minus the costs of its liabilities, ticked up in the first quarter compared with a year earlier, while many rivals saw declines because of pressure on asset yields.

 

 

The secret is low funding costs. Some 90% of Regions deposits are considered low-cost, meaning accounts where customers aren't locking up money for fixed, extended periods. Its average deposit cost is just 0.12%, barely half the costs for the peer group, Crowley of Eaton Vance says.

 

And here's the kicker: When market interest rates eventually rise from their rock-bottom levels, Regions could get a nice lift from the asset side of its balance sheet. That's because nearly half its total loan portfolio carries rates that reset periodically.

 

"We are better positioned than most" when rates rise, Hall says. Crowley estimates that a one-percentage-point increase in general interest rates would translate into a 9% increase in earnings for Regions.

 

Perhaps Hall's crowning achievement has been building up the bank's capital cushion. Its key Tier 1 capital ratio stands at 10.8%, about three percentage points above the requirement. That supports solid loan growth, a decent dividend of 2% and, possibly, some real expansion. "You could see them using that capital via M&A to fill in a number of markets where they don't have the density they need," says Goldman Sachs analyst Ryan Nash.

 

The Bottom Line

 

Regions' stock has more than tripled since 2011—and it could climb another 30%. The shares trade at just 90% of the company's book value, versus an average of 130% for peers.

 

Already, Hall has been building out some key new businesses. Regions has begun making auto loans and issuing credit cards, efforts to deepen ties to customers. The bank has been hiring more insurance brokers and financial consultants to serve wealth-management clients. The number of customers banking from mobile devices, meanwhile, jumped 25% last year as the bank rolled out new apps.

 

Soon, the wind may be at Regions' back. The economy in the Southeast, long an albatross for the company, is turning around, especially in Florida. In fact, the Southeast "is one of the best-performing regions in the country right now," says Edward Friedman, a director at Moody's Analytics.

 

It could be time for this stock to really blossom.