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Morningstar | Regions Financial Uses Hedging and Deposit Pricing to Offset Effects of Expected Rate Cuts

After the disastrous acquisition of AmSouth before the global financial crisis, Regions Financial has stabilized its core operations, and we believe an advantageous deposit base and an improving banking environment should help the bank. We see operational efficiency continuing to strengthen, and rising interest rates, tax cuts, and easing regulations all helping returns improve.Regions has been improving its operations over the past couple of years through internal initiatives and organic growth. The bank has improved efficiency by closing branches, reducing personnel, and re-evaluating additional spending, all while refocusing efforts within the digital realm. Recent consultations with McKinsey will likely lead to more initiatives coming out in the near term. After Regions exceeded several previous expense goals, we are confident that the bank's efficiency ratio will break the 60% threshold. In addition to improving operational efficiency, Regions' biggest strength is arguably its low-cost deposit base. This was on full display in 2017 and 2018, as deposit betas remained below peers, with deposit costs hardly moving.The bank has greatly improved the quality of its balance sheet. After heavy exposure to real estate-related loans during the crisis (over half the loan book), Regions has increasingly focused on its commercial lending business and reduced its exposure to residential mortgages, which went from 40% of the book to roughly 15%. Improved underwriting has also shown up with very manageable losses from its energy loan portfolio recently. Net charge-offs for the total loan book peaked at only 0.38%.With room for lower credit costs all but gone, and expense management already front and center, we see economic growth as the primary catalyst for revenue growth. That said, rate cuts are likely to challenge Regions' ability to generate revenue growth. Regions continues to make efforts in building its fee-based revenue stream primarily through its mortgage banking, wealth-management, and capital markets businesses, but the individual contributions are still smaller relative to the overall bank.