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Will Regions (RF) Q1 Earnings Miss on Revenue Headwinds?

Regions Financial Corporation RF is scheduled to report its first-quarter 2016 results before the opening bell on Friday, Apr 15.

In the last quarter, this banking giant delivered a positive earnings surprise of 10.5%.  Earnings increased 40% year over year. Revenues grew aided by higher non-interest income as well as interest income. Moreover, increase in loans and deposits were the positives for the quarter. However, higher provisions were the downside.

Will Regions be able to beat earnings after combating the challenges that the industry witnessed during the quarter? Let's see what factors might have influenced the earnings report this time around.

Factors to Drive Q1 Results

Overall, the banking industry has experienced a number of headwinds during the first quarter including heightened market volatility, decline in commodity prices, weak emerging markets, restricted business and consumer spending, rate hike uncertainty and tumbling energy prices.

The past few years were tough for banks’ mortgage business due to a strict regulatory environment. While a low-rate environment encouraged people to refinance home loans, commercial banks witnessed sharply declining fresh originations. Further, low margin on fresh mortgages due to low rates and a rise in nonbank lenders made the mortgage business miserable.
However, with the imminent rate hike cycle, significantly low unemployment rate and continued improvement in the housing market, mortgage rate and fresh origination volume should rise. But energy sector lending is expected to remain weak given the wild swings in oil prices.

Regions has been prudent in controlling costs, which could act as a tailwind for the quarter. Further, the company targets a $300 million expense reduction by 2018. Notably, the company expects 35–45% of this savings to be achieved in 2016. Regions also intends to achieve an efficiency ratio below 60%. While investing in revenue generating areas, the company intends to keep expenses at a stable to slightly increased level.

Despite the rise in loan demand, we do not expect significant growth in net interest income due to the persistent low interest rate environment.

The persistent decline in non-interest income has weighed on the top line over the last few years. Given the company’s previously announced posting order process for customer deposit accounts, which commenced in fourth-quarter 2015, decline in fee income in the lower end of the range of $10–$15 million in each quarter is anticipated. We believe this will further weigh on total non-interest income, thereby restricting top-line growth.

What Management Expects?

The growth in NII in fourth quarter 2015 included benefit from interest recoveries. However, for first-quarter 2016, management noted that such benefit is anticipated to be $4 million less sequentially. NIM is expected to remain stable.

On the expense front, FDIC fees are expected in quarterly run rate of $22 million to $24 million range excluding the impact of the proposed FDIC surcharge.

Given the current credit trends, management expects volatility in certain credit metrics, mainly related to larger dollar commercial credits in the company’s portfolio and fluctuating commodity prices.

For 2016, Regions expects NII growth in the range of 2% to 4%. However, in the event there is no further rate hike, NII may trend at the lower end of the range.  Adjusted non-interest income is expected to increase about 4% to 6% in 2016.

On the expense front, Regions expects adjusted expenses to trend from being flat to a modest increase while efficiency ratio is expected to scale below 63% in 2016. Operating leverage is anticipated in the range of 2–4%.

The guidance for 2016 also includes an average loan growth of 3–5% (excluding the impact of lease reclassification), average deposit growth of 2–4% and net charge-offs of 25 to 35 basis points.

Regarding the energy portfolio, management expects continued downward migration risk ratings, should oil prices remain at current levels. Charge-offs are expected in the range of $50–$75 million.  While the company has allocated reserves, which currently stand at 6% of direct energy exposure, it will continue to build reserves. However, management noted that potential losses will be manageable.

Activities of Regions during the first quarter of the year were inadequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter remained stable at 19 cents per share over the last seven days.

Earnings Whispers

Our proven model shows that Regions is likely to miss the Zacks Consensus Estimate in the first quarter. This is because a stock needs to have both a positive">Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least #2 (Buy) or #3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP: The earnings ESP for Regions is -5.26%. This is because the Most Accurate estimate of 18 cents is below the Zacks Consensus Estimate of 19 cents.

Zacks Rank: Regions’ Zacks Rank #4 (Sell) further decreases the predictive power of ESP.

Stocks That Warrant a Look

Here are some stocks you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Fidelity Southern Corporation LION has an earnings ESP of +2.86% and carries a Zacks Rank #2. It is scheduled to report first-quarter results on Apr 21.

The earnings ESP for PrivateBancorp, Inc. PVTB is +1.75% and it carries a Zacks Rank #3. The company is expected to release first-quarter results on Apr 21.

Simmons First National Corporation SFNC has an earnings ESP of +1.30% and carries a Zacks Rank #3. It is scheduled to report first-quarter results on Apr 21.

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PRIVATEBANCORP (PVTB): Free Stock Analysis Report
REGIONS FINL CP (RF): Free Stock Analysis Report
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