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Morningstar | Regions Completes Sale of Insurance Unit, Turns in Steady Results for 2Q. See Updated Analyst Note from 23 Jul 2018

No-moat Regions Financial reported second-quarter results that were in line with our medium-term expectations. Earnings per share were $0.32, up 28% year over year. The bank has made solid progress on multiple fronts, and we have been particularly impressed with its expense management; this quarter was no exception. As everything this quarter fit squarely in line with our own updated projections from last quarter, we are maintaining our fair value estimate of $16 per share, which represents 1.8 times tangible book value as of the end of the quarter. Provisioning came in better than our expectations, as credit conditions remain beyond good. Regions' Simplify and Grow initiative is well on track as more branches are consolidated, and more revenue and expense opportunities are identified. We project the bank will reach a normalized return on tangible equity of roughly 16.5%, which is still above management’s guidance of 14%-16% following tax reform. With just over $2 billion approved for more share repurchases and healthy net interest margin expansion, we believe Regions will maintain double-digit EPS growth for years.

Regions recently completed the sale of its insurance operations to BB&T, but adjusted noninterest income was still up 6% year over year. In general, Regions is hitting at the higher end of guidance for multiple line items, including noninterest income. Capital markets has seen healthy growth, and wealth management income is also staying at a consistently higher run rate. Given Regions' already strong deposit base, we like to see the bank developing stronger fee income streams. Regions' deposit base continued to shine during the quarter, with the total cost of interest bearing deposits increasing to 38 basis points, up from 33 basis points last quarter, an increase of only 5 basis points. This occurred while the yield on interest earning assets improved 10 basis points during the same period. Loan growth was minimal, with average loans and leases roughly flat year over year. However, after adjusting for certain one-time sales and the runoff of the indirect auto portfolio, growth was again roughly 1% year over year, and we would expect this to be about the overall growth rate for full-year results. We are still waiting for a pickup in commercial lending for the industry.

As noted above, Regions has just over $2 billion approved for share buybacks, and was able to increase its quarterly dividend over 50%. Given the excess capital at Regions, with a fully phased in common equity Tier 1 ratio of 10.9%, we see the firm as slightly advantaged in its ability to improve returns through the release of capital.

For a more in-depth take on capital returns in the banking industry and the effects of changing stress-test regulations, please see our special report entitled, "New Regulatory Proposals Will Change Stress Test Landscape," published on July 8.