Regions Has The Pieces In Place For Ongoing Growth

 

Banks have done well on a sector-wide basis since my last update on Regions Financial (RF), but my bullishness on this leading Southeastern franchise has nevertheless been rewarded, as the shares have outperformed its peer group by close to 10% (and the S&P 500 by around 15%) on growing recognition of the bank’s potential to generate double-digit pre-provision growth as loan demand improves and rates head higher.

Regions isn’t a perfect story – the Southeast is getting more and more competitive, higher expenses need to be monitored, and deposit betas are a big unknown – but I like the moves the company has taken to improve its loan growth outlook and its asset sensitivity. Region’s outperformance has brought it back to the pack as far as valuation goes, but I still lean favorably on this name.

 

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Regions Has The Pieces In Place For Ongoing Growth

Regions Financial Continues To Put The Pieces In Place For Better Longer-Term Performance

 

There are certainly things to like about Regions Financial (RF), including a generally conservative underwriting culture, very low deposit costs due to a high-quality, sticky deposit base, and management’s decision to hedge away some of the bank’s rate risk. Even with those positives, I thought the shares were fully and fairly valued back in February, and the stock has modestly underperformed its regional bank peers since then, with the shares basically flat.

I’m more bullish on the shares largely due to that lackluster relative performance, but investors have a lot of banks to choose from in the Southeast, some even more undervalued than Regions. I do like the acquisition of EnerBank and management’s decision to invest in upgraded IT capabilities, as well as management’s decision to start rolling back some of its hedges. On the negative side, I do have some concerns that low vaccination rates across Regions’ footprint could represent a threat to recovering business activity in the region, hurting the outlook for loan demand recovery.

 

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Regions Financial Continues To Put The Pieces In Place For Better Longer-Term Performance

Regions Financial Benefiting From Hedges, And With Capital To Spare

Another important lesson of investing is to let your winners run. I liked Regions Financial (RF) in the midst of the pandemic-driven downturn and liked them a quarter ago, but I did shift my preference to other names that hadn’t performed quite as well. That was too early to dismount, as the shares have since run another 50%, beating the broader sector though a handful of in-region rivals like Pinnacle (PNFP) and Synovus (SNV) have done even better.

I like Regions’ rate hedges and conservative outlook on reserve releases and credit management. I also like the capital flexibility the company will have as 2021 develops (assuming credit doesn’t take a sudden downturn). Last and not least, Regions would be a digestible asset for a larger bank looking to establish a presence (or a larger presence) in the faster-growing Southeast U.S. What I don’t like so much at this point is the valuation, as Regions seems more or less fairly-valued now at a time when there are still some discounted names in the banking space.

 

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Regions Financial Benefiting From Hedges, And With Capital To Spare

Regions Financial Delivers One Of The Better All-Around Performances So Far

Conservatism seems to be suiting Regions Financial (RF) right now, and the bank is getting more appreciation and recognition for its meaningful fee-generating business, its hedging position, and its optionality to offset weak revenue with further cost reductions.

In my last article, I said that I thought Regions “is materially undervalued”, but I thought it would take a little longer for the Street to warm up to the name. Since then, the shares up 20%, handily beating its peer group. Although Regions has come further faster than I expected, the shares still look meaningfully undervalued, and this remains a name worth considering, though one that still doesn’t have what I’d call a top-tier pre-provision profit profile over the next few years given ongoing spread and loan demand pressures.

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Regions Financial Delivers One Of The Better All-Around Performances So Far

Risk Perception Around Regions Financial Will Remain A Near-Term Headwind

With the Street running scared amid greatly elevated modeling uncertainty (for the economy as well as individual companies), risk perception is a significant factor today, and one that doesn't help Regions Financial (NYSE:RF). Only time will tell whether Regions' loan book is as risky as the Street seems to think it is, but for today's valuation to make sense on a long-term basis, you basically have to assume a significant long-term impairment in returns below the cost of equity and/or the need to raise meaningful capital to cope with elevated loan losses.

I do believe that loan losses will accelerate from here and that Regions will have to add to its reserves (I also believe this is true for virtually all of Regions peers). Even if Regions does have a worse-than-average experience with its loan book over the next few years, I don't think it will be as bad as the Street is pricing in. I thought Regions was undervalued before on similar concerns about its credit quality (as well as its rate exposure), and while the shares do look substantially undervalued, that's true of so many stocks now that investors are almost spoiled for choice unless you believe a truly ugly credit/capital evolution is on the way.

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Risk Perception Around Regions Financial Will Remain A Near-Term Headwind

Regions Financial Lagging On Weak Loan Growth And Lingering Credit Worries

Among the banks I like, Regions Financial (RF) has been pretty underwhelming, with the shares lagging their peer group by about 4% since my last update and a few percentage points over the past year as well, as the Street remains unimpressed with the weak loan growth, ongoing credit costs, and limited capital opportunities. None of that is going to be fixed by fourth quarter earnings; Regions didn't post a bad quarter, but guidance for positive operating leverage doesn't seem to have convinced the Street, particularly in light of weak lending performance.

I think Regions management is doing a lot of the right things - focusing on loan returns (versus growth), operating efficiency, and sources of non-spread-based income growth. Still, I don't love this name so much because I love the company or management as I think the valuation is out of whack (with a fair value close to $19%). Valuation unfortunately isn't a catalyst in and of itself, and investors will need patience for this to work, meanwhile more dynamic names like Synovus (SNV) and First Horizon (FHN) still offer upside among Southeast U.S. banks.

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Regions Financial Lagging On Weak Loan Growth And Lingering Credit Worries

Regions Financial On Target With Its Conservative Approach

I've been making the argument for a little while now that the more conservative approach favored by Regions Financial (NYSE:RF) is the right one for the present circumstances, and also that the company's efficiency initiatives and hedging program would give the bank a solid chance of posting peer-leading pre-provision profit growth through this more challenging part of the cycle. Since my last update, the shares have modestly outperformed the bank's regional peers (by about 1% to 2%), though the trailing twelve-month performance is more ordinary - which makes sense to me as Regions' relatively better positioning is only starting to emerge here of late.

The ongoing increase in criticized loans is a worry to me, but Regions has been proactive and comparatively open in addressing its credit quality. I continue to believe that Regions is undervalued today, though Regions could certainly help its case with better revenue growth, and I believe M&A is at least a possible source of upside.

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Regions Financial On Target With Its Conservative Approach

Hedging And Cost Control Enough For Regions Financial To Outperform

There is no shortage of bank stocks that look undervalued today, but the key is to find banks that will somehow stand out in the next, more challenging, phase of the cycle – a cycle that will see spread compression from rate cuts, so-so loan growth prospects, and rising credit costs. I thought that Regions Financial (RF) was undervalued back in January but lacking in catalysts, and the shares have lagged regional bank indices by about 3% to 6% since then.

Regions is looking a little more interesting to me now, though. Management’s forward-thinking hedging strategy should limit some of the spread compression damage, and management is likewise focused on continuous efficiency improvement as a key driver over the next few years. Credit costs are a concern, and Regions doesn’t have great fee-based offsets, but this is an incrementally more interesting story and the mid-single-digit pre-provision profit growth I expect from Regions over the next three to five years could drive relative outperformance.

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Hedging And Cost Control Enough For Regions Financial To Outperform

Huntington Bancshares Undervalued, But Not Looking Catalyst-Rich

Finding undervalued stocks is one thing, but finding catalysts and drivers that will close that valuation gap is often an overlooked part of the investment process (and a part of the whole “value trap” phenomenon). When I look at Huntington Bancshares (HBAN), I see a basically well-run bank trading more than 10% below fair value. I also see a bank that is forgoing some near-term growth to improve its full-cycle performance.

What I don’t see, though, is what will change investors’ minds about these shares in the near future. Worries about the health of shorter-cycle industrial markets are relevant to this Ohio/Michigan-centric back, as are the ongoing tariff issues with China and Mexico and the uncertain prospects for the USMCA. On top of that, while I think Huntington would/will do better in a banking downturn, the near-term outlook for pre-provision profit growth is pretty average-looking.

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Huntington Bancshares Undervalued, But Not Looking Catalyst-Rich

Regions Financial's Slow-And-Steady Approach Not Really Standing Out

Regions Financial (RF) has chosen a different strategic approach from many of its peers recently, prioritizing quality over quantity and capital returns over growth. It hasn’t made all that much difference in terms of share price performance, though, as the shares have done about as well as the major regional bank indices, while lagging some peers like BB&T (BBT) and Bank of America (BAC) while outperforming SunTrust (STI) and First Horizon (FHN).

I like Regions’ strong core deposit franchise, and I think there’s some potential in the company’s specialty lending efforts. I also think prioritizing credit quality should pay off over the next few years, but I am concerned about how Regions’ relatively modest near-term and long-term earnings growth prospects will be priced by the market, even though capital returns should be strong. I do believe Regions is undervalued, but then so are most banks, and upside is likely tied to stronger spreads and/or efficiency gains than I currently model.

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Regions Financial's Slow-And-Steady Approach Not Really Standing Out

Quality Over Quantity Paying Off For Regions Financial

Regions Financial (RF) hasn’t been setting any records lately for revenue, pre-provision profit, or loan growth, but Regions’ focus on cleaning up its credit and improving its cost efficiency has still produced some solid benefits for shareholders. Among its peer group (and regional banks in general), Regions has been a good performer over the last few years, doubling over the last two years and meaningfully outperforming the likes of Synovus (SNV), BB&T (BBT), Wells Fargo (WFC), BancorpSouth (BXS), and First Horizon (FHN).

Competition is heating up in several markets important to Regions, but the bank still has room to benefit from further efficiency improvements while also starting to think a little more about lending growth again. Whole bank acquisition is likely off the table at current valuations, but mid-single-digit long-term earnings growth can still support a share price closer to $20.

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Quality Over Quantity Paying Off For Regions Financial

Hancock Holding Seems Richly Valued For What It Offers

Almost the entire banking sector has gone on a run since the election, so it's not exactly surprising to see that Hancock Holding's (NASDAQ:HBHC) shares ran up about one-third from the time of the election to a recent high of $45.50. Still, this is one where I have a harder time excusing the new premiums, given Hancock's ongoing problematic exposure to souring energy loans, slowing loan growth, and larger challenges in spread income growth.

I think it was smart of Hancock to raise equity at this higher valuation, as it is always better to raise money when you can as opposed to when you must, and it does bump up the company's capital ratios. At this point I could see Hancock as either (if not both) an opportunistic buyer within its current footprint or a seller at the right price. While a larger bank could justify a premium as part of a buyout, I'd be uncomfortable holding a bank stock that really needs that buyout to make the valuation seem reasonable.

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Hancock Holding Seems Richly Valued For What It Offers

BancorpSouth Seems To Have A Harder Path To Growth

Sometimes different is better. Bank of the Ozarks (NASDAQ:OZRK) has focused on specialized real estate lending in the South to fuel exceptional growth, while Ameris (NASDAQ:ABCB) has used serial M&A to acquire footholds in multiple Southern growth markets. In the case of BancorpSouth (NYSE:BXS), though, I'm less certain that its different strategy of targeting mid-sized geographies with less competition is going to work out as well over the long run.

There are positives to this story. BancorpSouth should be approaching the end of some serious regulatory issues that have restricted its operations (particularly with respect to M&A), the company's capital position is fine, and the company's credit situation looks healthy. What's more, it generates a significant amount of fee/non-interest revenue and there is still operating cost leverage left to achieve. All of that being said, the market seems to be already pricing in mid-teens long-term growth, and I don't think that leaves a lot of room for disappointment or outperformance.

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BancorpSouth Seems To Have A Harder Path To Growth

Iberiabank In The Middle Of A Tough Balancing Act

While the share price at IBERIABANK Corp. (NASDAQ:IBKC) ("Iberiabank") has rocketed up since the election (along with many, if not most, other bank stocks), there are still a lot of areas where management has work to do. The energy portfolio has shrunk, but credit quality has worsened, and there are some legitimate concerns about how management has been managing excess liquidity in a low-rate environment.

As is often the case with most stocks, a lot of it comes down to valuation. If Iberiabank were trading around 1.5x tangible book, I'd be excited about the deposit footprint and the toeholds in multiple growth markets across the South. As it is, though, I think the Street is more than rewarding the stock for the improvements in operating efficiency, the probable loan growth trajectory, and the possibility of a more constructive regulatory environment.

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Iberiabank In The Middle Of A Tough Balancing Act

Synovus Facing Some Tough Decisions

Credit where due - Synovus Financial (NYSE:SNV) management has done a great job over the last three or four years. One of the weakest mid-cap banks in the depths of the credit crisis, Synovus has done a very good job of cleaning up its credit, reinvesting in the business, and building up its capital position. With that, the return on tangible equity has improved about four points, tangible book value has improved about 10%, and the shares have solidly outperformed many regional peers.

But there is what I believe to be a very relevant "now what?" question with Synovus. Management has been returning capital to shareholders (which the market has certainly appreciated), but I think there's a choice to be made now whether to continue with the "slow and steady" approach of improving profitability through cost efficiency, continue a shift toward more C&I and retail lending, and maintaining solid buybacks, or whether to deploy capital more aggressively with M&A.

On its own, I don't think Synovus is particularly cheap right now. I do think the bank will return to low double-digit ROEs in time and I think the interest sensitivity here is appropriate, but the valuation seems right for all of that. Given the bank's footprint, though, ongoing M&A remains a real possibility - whether as a buyer or a seller.

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Synovus Facing Some Tough Decisions

Fifth Third Has Done Well In The Market, But Conditions Are Still Tough

Fifth Third (NASDAQ:FITB) has been a relatively strong name this year within the group of banks I follow closely, with the shares outperforming the likes of BB&T (NYSE:BBT), U.S. Bancorp (NYSE:USB), Wells Fargo (NYSE:WFC), and PNC (NYSE:PNC) since my last update on this Cincinnati bank. While this probably sounds like sour grapes, I wonder if this has been part of a "flight from quality" as names like Comerica (NYSE:CMA) and Regions (NYSE:RF) have also been doing better in part on less fear about energy credits and more optimism regarding the opportunities down the road from cost cuts and higher rates.

I struggle to make the valuation really work now. Even assuming that Fifth Third is on the higher end of the range in terms of ROE improvements over the next five to 10 years, I still don't see it being up there with the likes of U.S. Bancorp or Wells Fargo. I think Fifth Third is more likely to generate mid single-digit earnings growth, and that supports a fair value around $21 to $23.

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Fifth Third Has Done Well In The Market, But Conditions Are Still Tough

BB&T Executing While The Industry Watches Time Pass

Another quarter has gone by, and nothing has really changed for the better (or worse) for the broader banking industry. I believe this "muddle-through" environment favors banks with strong execution capabilities, and that includes the likes of BB&T (NYSE:BBT), PNC (NYSE:PNC), and U.S. Bancorp (NYSE:USB), but it doesn't make for the most dynamic stock calls in the near term. Instead, riskier names like Comerica (NYSE:CMA), Regions (NYSE:RF), and Zions (NASDAQ:ZION) have been the names catching the bids over the past couple of months.

BB&T is what it is, and I believe it remains a reasonable buy-and-hold prospect. I see more long-term potential here than with U.S. Bancorp or PNC on the basis of ROE moving toward 10% over the next five years and then into the 12%s down the line, with acquisitions and synergy helping to drive double-digit earnings growth in the coming years. With that, I think BB&T can be bought into the low $40s.

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BB&T Executing While The Industry Watches Time Pass

Seeking Alpha: First Horizon In Good Shape, But Looking At A Hard Slog

I thought Tennessee's First Horizon (NYSE:FHN) was more or less fairly valued a year ago, and I haven't missed out on much, as the shares of this regional bank are pretty much where they were a year ago. Of course, there's been movement in between, as bullishness on the prospect of rate hikes and loan growth saw these shares exceed $16 back in the summer before getting caught in the general downdraft.

I'm a little torn on First Horizon. On one hand, I applaud the management for being quite transparent with its plans and goals, but I don't think it's necessarily going to be able to reach all of those goals. Likewise, while I don't see much undervaluation in the shares on an "as is" basis, the stock should definitely do better if rates start heading up and/or if management deploys more of that surplus capital toward M&A. With all of that in mind, I'd call this a "high-quality hold"; I don't see enough undervaluation to buy these shares when BB&T (NYSE:BBT) and Regions (NYSE:RF) both look more undervalued, but there are definitely worse places for a bank stock investor to hang out while waiting for better conditions.

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First Horizon In Good Shape, But Looking At A Hard Slog

Seeking Alpha: Bank Of The Ozarks Offers Rare Growth, But It'll Cost You

Watching Bank of the Ozarks (NASDAQ:OZRK) continue to climb higher is a little like standing outside of a restaurant and watching people eat your favorite food. I have tremendous respect for this bank's management and its business plan, but I've never been able to construct a model that makes me comfortable with the valuation. That's particularly true given that the bank hasn't exceeded my financial performance expectations by all that much, suggesting to me that Wall Street is simply willing to pay more for the company's growth than I am.

Not much has really changed in any of those respects. I like the company's 2015 acquisitions and I believe OZRK can generate more than 25% earnings growth per year (CAGR) for the next five years. But even with the 20% pullback in the shares from its 52-week high, I just can't make the numbers work from a value perspective. Painful experience has taught me not to stick my neck out in situations where I can't make sense of the valuation, but more aggressive and/or valuation-insensitive investors could see more on offer here.

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Bank Of The Ozarks Offers Rare Growth, But It'll Cost You

Seeking Alpha: BB&T A Little Poky, But Can Build From Here

The overall theme for most bank earnings reports this quarter has been "good enough, but not great", but BB&T (NYSE:BBT) broke from the pack a bit in the wrong way. BB&T's results were a little light, as weaker fee income weighed on revenue and drove a slight operating profit miss. Management was a little more upbeat about 2016 than fourth quarter results might have suggested, though, and there is scale to accelerate lending and drive operating synergies from the company's recent acquisitions.

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BB&T A Little Poky, But Can Build From Here