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Morningstar | Another Solid Quarter for Regions; Maintaining Our FVE. See Updated Analyst Note from 24 Oct 2018

No-moat Regions Financial reported third-quarter results that were in line with our medium-term expectations. Earnings per share amounted to $0.32, up 28% year over year, and in line with last quarter’s results. The bank continues to hold the line on expenses, which were essentially flat year over year. Regions also broke through the 60% efficiency ratio barrier for the first time in over a decade, with an adjusted ratio of 58.1% during the quarter. We had felt shares were pricey in 2018, but after the recent declines, we believe shares are beginning to look fairly valued. We are maintaining our fair value estimate of $16 per share, which represents 1.9 times tangible book value as of the end of the quarter.

Credit quality remains pristine as provisioning continues to come in at the low end of our expectations. Adjusted average loans were up 3% year over year, even as deposit balances were down. Wealth management clients and corporate clients continue to deploy excess liquidity in the current rising rate environment, leading to the deposit outflows; however, Regions continued to increase net new consumer accounts. Regions has had one of the lowest deposit betas under our coverage, and this continued in the current quarter, as total interest-bearing deposits only moved up in yield by 6 basis points. This is only a slight acceleration from the 5-basis-point moves we have seen in previous quarters, which is a testament to the advantage Regions has here. We also highlight that the majority of Regions’ deposits are consumer deposits, where there are no credit rate adjustments operating in the background, so this is a true advantage. As such, we expect continued net interest margin expansion for the bank, without a compensating decline in deposit service fees.

Fee income continued its steady increases, up 1.4% quarter over quarter and 7.7% year over year, even in the face of mortgage headwinds. We like that Regions is developing additional fee lines, as this should increase the value of the franchise over time. Fee income growth, combined with expanding net interest margins and expense control, should get the bank into a mid-50s efficiency ratio over the next several years. This will be some of the best performance we have seen out of Regions in roughly a decade or more.