Banking, finance, and taxes

Analyst Shows Why Regions Financial Remains Overlooked and Undervalued

Jon C. Ogg

Published: January 23, 2017 11:20 am

Last Updated: January 12, 2020 3:38 pm

Regions Financial Corp. (NYSE: RF) has been among the many financial stocks benefiting from the post-election rally. The return to more loans, higher rates and less regulation is seen as a boon to banks like Regions Financial.

Now that the banks, including Regions, have reported earnings, there have been many analyst calls around the sector. One issue that has become hard to get around is that many of the banks have seen their shares rise higher than their consensus analyst price targets from Thomson Reuters. That might not mean that the banks cannot rally ahead, but it means that the rally went above and beyond what most analysts have said is a fair value.

Regions Financial shares were last seen trading down 10 cents at $13.94 on Monday, but that is still up a whopping 28% from the pre-election closing price of $10.89.

One firm believes that considerable upside remains. Peter Winter and David Chiaverini of Wedbush Securities have an Outperform rating, and they have a $16 price target for the next 12 months. If they are correct, that implies upside of 15%. Then there is the dividend yield of almost 2% to consider, as well as their book value being just $13.04 per share.

With the stock’s 52-week trading range of $7.00 to $14.93 and consensus analyst target price of $15.17, 24/7 Wall St. wanted to see what it is that the analysts at Wedbush are so much more positive than the consensus analyst target.

Region’s reported core per-share earnings that were in line with the Wedbush estimate, and it managed to beat the consensus by a penny. The team said:

Although loan growth was weaker than expected, we like the Regions strategy of shifting out of credit-only relationships and focusing more on relationship banking with an emphasis on higher returns, with lower credit risk. The margin is coming in better than expected, with good upside.

One issue also worth noting was that the loan growth weaker than expected. This was shown to be partly intentional and that the bank’s margin outlook is positive. The report said:

Average loans declined by $694 million following a $677 million decline in the third quarter. Regions has reduced exposure in areas that carry higher risk or credit only relationships, like energy, multi-family, investor commercial real estate and indirect auto. The good news is consumer loans continue to increase, up 1% linked quarter. Also, RF noted increased optimism from its client base, but it has not translated into loan growth. If middle market and small business customers start borrowing that would create a lot of earnings leverage as this group makes up about 25% of earnings and has essentially stayed on the sidelines for several years.

Net interest margin (NIM) increased 10 basis points in the fourth quarter to 3.16% and the outlook is for it to increase into the low 3.20% range in 1Q17. It should hold steady in 2Q17 assuming the yield curve remains the same, while a steeping yield curve would benefit the margin further.

One issue that was brought up as a partial caveat or risk is that Regions Financial is committed to hitting its goal of 12% to 14% return on average tangible common shareholders’ equity in 2018. This was just 9.96% in the fourth quarter. Wedbush’s report shows that Regions still has a way to go to achieve its goal. They said:

However, the recent increase in rates will help, and so will a rebound in middle market & small business lending to the extent that it comes through. Plus, Regions’ CET-1 ratio is the second highest among the regional banks at 11.0% and the goal is to lower it to 9.5% through more aggressive capital returns as part of its 2017 CCAR plan.

As far as how the Wedbush team sees Regions $16 target and valuation, that is based on 12.6 times the firm’s 2018 earnings per share estimate. While that might sound higher than the 10-times multiple in more recent years, the firm shows that this is actually a discount to Wedbush’s regional bank group median of 13.5 times.

Prior to the election, the consensus price target from Thomson Reuters was all the way down at $10.84. Then it went to $12.06 in the two weeks after the election, and it was north of $14 at the end of December.

In an effort to keep this review from being just one-sided, here are some of the other recent analyst summary calls. An issue that may be causing some weakness, on top of a sell-the-news reaction, was that Regions Financial was downgraded to Neutral from Buy, but with a $15 target price, at Compass Point. Other post-earnings calls were seen as follows:

• Deutsche Bank has a Hold rating and $13 target.
• S&P Capital IQ has a Hold rating and a $15 price target.
• UBS had a Sell rating and a $13 price target.