Regions Financial Corp. (NYSE: RF)
According to the stocks portal beststocks.com Regions Financial Corp. (NYSE: RF) with a target price of $15 is expecting a full earnings recovery in 2023. RF continues to take prudent steps in controlling expenses and managing credit and interest rate risk.
The adjusted pre-tax pre-provision income was $707 million, the highest in the last ten years, reflecting record mortgage production and increased deposits. Regions continues to maintain a strong capital position. The company’s Tier 1 capital ratio was 10.8% and the common equity Tier 1 ratio was 9.3%. The company didn’t repurchase any shares in the third quarter, reflecting the previous announcement of the suspension of buyback through 2023. It declared $149 million in dividends and will recommend to the board that the dividend be maintained at the current level for 4Q20. We note the attractiveness of the 4.8% yield of the current dividend, higher than many of its peers.
Loan loss provisions declined to $113 million from $700 million in 2Q20.
Net interest income rose 5% to $1 billion, reflecting greater use of the balance sheet. The net interest margin fell 31 basis points to 3.13%, primarily due to increases in cash and PPP loans offset by increases in its hedging program. Noninterest income rose 9% to $608 million versus the prior-year quarter as growth in the Mortgage, Card fees and Wealth Management were offset by weaker results in Capital Markets. Noninterest expense rose 3% due to an increase in salaries and benefits.
Net charge-offs fell to 0.50% of average loans in 3Q20 versus 0.80% in 2Q20 due to improvements in business services. Management anticipates no further reserve build if current trends continue. Nonperforming loans increased to $767 million, increasing 19 basis points to 0.87% of total loans due to downgrades in the retail and energy sector.
EARNINGS & GROWTH ANALYSIS
The company will not provide guidance for the foreseeable future due to the unknown effects of the pandemic.
We expect net interest income growth in the low single digits in 2023 as the company’s hedging strategy will help mitigate earnings volatility.
Liquidity remains ample, with a low loan to deposit ratio of 70%.
Credit quality remains strong, in our view, in light of the large decrease in provision expense in 3Q20. Commercial loans totaling $55 billion accounted for 67% of the total exposure. Areas of concern are the energy and restaurant sectors. The company has $1.15 billion in loans to energy companies, of which $494 million (43%) are currently criticized. We note that the majority of the criticized loans are to E&P companies. It also has $730 million in outstanding loans to restaurant companies, of which $292 million (40%) are currently criticized. The majority of these loans went to quick-service restaurants, which have been allowed to operate during the shutdown. We expect further write-downs as oil prices have remained low and casual dining may take time to recover.
FINANCIAL STRENGTH & DIVIDEND
The company didn’t repurchase any shares in the third quarter, reflecting the previous announcement of the suspension of buyback through 2023 It declared $149 million in dividends and will recommend to the board that the dividend be maintained at the current level for 4Q 2023. We note the attractiveness of the 4.8% yield of the current dividend, higher than many of its peers. Our dividend estimates are $0.62 for both 2023 and 2023.
MANAGEMENT & RISKS
RF is led by president and CEO John Turner. However, it will not provide guidance for the foreseeable future due to the unknown effects of the pandemic.
Regions also faces pressure from the merger of SunTrust and BB&T.
The company has 1500 banking offices and over 19,000 employees in 15 states, mainly in the South and Southeast.
RF is trading at 8-times our 2023 EPS estimate, a discount to its regional bank peers despite what we view as the company’s above-average growth prospects. We also expect Regions to fully recover once the effects of Coved-19 abate. We are encouraged that Management doesn’t expect further provisions if conditions continue to improve and continues to work with clients on loan deferments and modifications. Our target price of $15 assumes a higher multiple of 10-times our EPS estimate for 2023, when we expect earnings to recover and the yield curve to steepen.
KeyCorp. (NYSE: KEY)
KeyCorp. (NYSE: KEY). Lending growth was helped in 2Q and 3Q by Paycheck Protection Program lending and drawdowns on corporate credit facilities; however, it is likely to be more muted going forward due to still weak economic growth and tighter underwriting standards. Net interest margins are also expected to contract through 1Q21 following the Federal Reserve’s rate cuts.
The company has benefited from positive regulatory developments. Mid-sized banks received favorable regulatory news in May 2018 with changes to the Dodd-Frank Act. One of these changes raised the minimum level of assets for bank holding companies subject to stress tests to $250 billion. We believe that these reduced regulatory requirements have been beneficial for banks in the $50-$250 billion range, which include KeyCorp.
The beta on KEY is 1.47.
Revenues rose 4% to $1.68 billion.
Net charge-offs were $128 million in 3Q20, down from $196 million a year earlier. Over the past four quarters, net charge-offs of $407 million have been well below loss provisions of $1.11 billion, as the company took a substantial provision in 1Q20 in light of CECL accounting changes and in advance of losses expected as a result of the pandemic.
Noninterest income was up 5%, aided by strong growth in mortgage income, as well as in cards and payments income.
EARNINGS & GROWTH ANALYSIS
Average loans were up 14% in 3Q20, boosted in part by Paycheck Protection Program lending. Companies also drew down lending facilities to store cash in anticipation of weaker economic conditions. Based on our expectations for continued high unemployment, weaker consumer spending, and lower business confidence, we expect growth in earning assets to be in the low single digits into next year.
Credit quality remains a wild card for 2023 and 2023 given the potential for sizable credit losses from high unemployment. The company has guided toward net charge-offs of 0.55%-0.65% of average loans in 4Q, which would be up from the 0.49% recorded in 3Q.
Expenses remain a bright spot due to efficiency measures, but have been impacted by weak revenue growth. The 3Q20 cash efficiency ratio was 60.6%.
FINANCIAL STRENGTH & DIVIDEND
KEY’s capital plan calls for a dividend of $0.185 per common share.
In 2019, the company paid $0.71 in dividends. Our dividend estimates are $0.74 for 2023 and $0.88 for 2023. The company has a long-term target payout ratio range of 40%-50%.
MANAGEMENT & RISKS
KeyCorp is led by Chairman and CEO Chris Gorman, who assumed those roles in May 2023 following the retirement of Beth E. Mooney. Mr. Gorman was previously president and COO. Don Kimble is vice chairman and CFO.
The company has a diversified business model. The Key Community Bank segment includes branch-based deposit and investment products; personal finance services; and loans, including residential mortgages, home equity, credit card, and various types of installment loans. The Key Corporate Bank segment includes syndicated finance, debt and equity capital markets, commercial payments, equipment finance, commercial mortgage banking, derivatives, foreign exchange, financial advisory, and public finance.
Among mid-cap regional banks, KeyCorp competes primarily with Fifth Third Bank and Regions Financial.
With about 1,000 branches in 15 states and assets of approximately $170 billion. The company also operates a national consumer bank and a national corporate bank.
At current prices near $13 and down about 37% from its 52-week high, KEY trades at a slight discount to tangible book value.
Analysts believe this discount is unwarranted given the company’s favorable ROE and efficiency metrics and strong credit quality. Our target price of $15 implies a multiple of 11-times our EPS estimate for 2023, when we expect an earnings recovery to be underway.