Company Update. November 8, 2016

Transcription

1 Source (all data): FIG Partners Research, SNL Financial LC Christopher Marinac, CFA Company Update November 8, 2016 Please see important disclosures regarding FIG Partners equity rating system, distribution of ratings, and other report disclosures on the last page of this report. Ideas & Execution on Financial Institutions (404) RF-Regions Financial Corporation Notes From Management Meetings At Company Headquarters Maintain EPS Estimates & Price Target ($0.95 in 2017, $0.23 in 4Q16, and $11.25) Company management vigilant on positive operating leverage, reducing overhead Loan growth likely to remain slow in near-term, but Fee Income initiatives are important We visited with company management in Birmingham on 11/7 and reiterate our prior $0.95 EPS forecast in 2017 with a $0.23 estimate in 4Q16 FIG is $0.03 above the Street consensus in 17 and one penny higher in 4Q16. The highlights of our half-day of meetings was slow Loan growth in the near-term, modest expansion in 2017 (Loans rise at least on par with U.S. GDP growth, or slightly better), with vigilance on Expenses for consistent positive operating leverage. We also sense solid underpinning on Fee Income initiatives on both Core Deposit items as well as success building Capital Markets (albeit small but clearly accretive to overall Revenue). Recycling Loans is an important concept for RF s leadership team. Keeping certain commercial areas flat (i.e., SNCs) with disciplined selection of CRE Loans (despite low concentration ratios here) within a more focused relationship approach is a key factor in the limited Loan growth. But, expanding Consumer areas is a high priority in Other Consumer In-Direct areas (both unsecured and secured, such as home improvement). Moreover, RF intends to manage TCE ratio to 9.5% which supports its increase in share repurchases to $760 Mil. from prior CCAR-approved figure of $640 Mil. in mid-2016 (see our report). CFO David Turner called 3Q16 one of the noisiest quarters in his tenure at the company and the focus on showing better Expenses near-term is quite evident. Despite missing Street expectations last quarter, we see a much greater chance for reduced Costs in 4Q16 that nails the positive operating leverage goal. We heard multiple examples of cost improvements already underway that should yield results this quarter and in early The company remains challenged with quarterly timing, but it appears this is less of an issue in 4Q16 and 1Q17 noise may be restrained. This optimism seems to be reflected in recent strength in RF s share price. FIG Partners 2017 EPS estimate includes 3% Loan growth and 1.8% higher Earning Assets. Credit costs should be stable as Energy reserves are utilized for necessary charge-offs and overall Loan losses remain between 35 to 40 basis points through year-end Modest balance sheet expansion and a minor amount of retained earnings plus share repurchases take TCE to 9.45% by late Plenty of flexibility remains for RF to achieve 7.5% more tangible book value during the next 5 quarters. Our rating remains at Market-Perform. RF: $10.96 Market-Perform // Price Target: $11.25 Summary Statistics Exchange NYSE Market Cap ($M) $13,491 Avg. Share Volume Annual Dividend 19,123,065 $0.26 Annual Yield 2.4% Tangible Book/Share $9.38 Price/Tangible Book 117% Price/2016 EPS 12.6x Price/2017 EPS 11.5x Total Assets ($M) TCE/TA $125, % ROTCE (2017) 9.6% ROA (2017) 0.94% EPS Estimates Q Q Q Q FY Industry Type Bank Headquarters Birmingham, AL Offices 1,666 Date Established CEO 2004 O. B. Grayson Hall Jr. CFO David J. Turner Jr. Atlanta Chicago Jacksonville Los Angeles New York Raleigh San Francisco Member of FINRA/SIPC

2 Key Items We Heard At Our Visit To Company Headquarters On : Corporate Lending In SNCs Is Limited To $38 Bil. Recycling Credits, No SNC Growth Client Selectivity vs Client Profitability (RF is moving towards the latter after several quarters of the former) Capital Markets Build-Out Continues, $120M Annual Revenue Pace Retail Evolution Towards Digital Unfolding Quickly, $70 to $80M Technology Spending (includes CyberSecurity) Opportunities To Charge Fees For Convenience (Immediate Funds Availability, NOW Banking with check cashing, Western Union, and success with money orders too) Other Indirect Consumer has success with small-ticket unsecured Consumer as well as GreenSky partnership (home improvement). HELOCs are running off Core Deposit Growth Remains a Key Focus at RF - desire to raise Loans-to-Deposits ratio but not backing away from new core funding New Initiatives in Medical Point-of-Sale lending with full recourse to local hospital systems this begins soon, much desired by hospitals who seek to speed up their collection process. Overdraft Changes to fee income adjust are largely in place order posting effort has reset this revenue item CFPB Complaints are 4th-fewest among large Banks nationwide Office space overhaul in Birmingham soon to haircut $7 million or more from overhead (just one example of near-term overhead efforts). CECL implementation is in early stages for credit and internal accounting teams. No external communication planned for several quarters but Chief Credit Office made a strong case for understanding Average Loan Lives across Banks given the new expected loss model Energy loans should decline 10%, charge-offs remain low but past loss expectations are not changing (pushed into 2017). Price stack on Crude oil is $45.50 today, $48.00 in Expecting supply restraints and modest demand improvement within RF s outlook. Rig count is up slightly in recent weeks, this could be nascent signal that bears watching. SNC Exam had little new on Energy but a broader study of TDRs-Troubled Debt Restructurings was noted by multiple RF executives. CRA rating of needs improvement should be improved soon, perhaps by year-end 2016 Auto lending likely to experience reduced balances C&I Loss rates expected to be stable 2

3 11/4/14 11/18/14 12/2/14 12/16/14 12/30/14 1/13/15 1/27/15 2/10/15 2/24/15 3/10/15 3/24/15 4/7/15 4/21/15 5/5/15 5/19/15 6/2/15 6/16/15 6/30/15 7/14/15 7/28/15 8/11/15 8/25/15 9/8/15 9/22/15 10/6/15 10/20/15 11/3/15 11/17/15 12/1/15 12/15/15 12/29/15 1/12/16 1/26/16 2/9/16 2/23/16 3/8/16 3/22/16 4/5/16 4/19/16 5/3/16 5/17/16 5/31/16 6/14/16 6/28/16 7/12/16 7/26/16 8/9/16 8/23/16 9/6/16 9/20/16 10/4/16 10/18/16 11/1/16 FIG Research Rating: "Market-Perform" Price Target: $ Multiple Price Reported EPS $ x $11.00 Dividends $ x $0.26 Excess Capital $ x $0.00 Combined $11.25 Tang.Book Dec-16 $ x $ RF's Relative P-to-TBV Discount vs. Large Peers: Past 2 Years 0.0% (5.0%) (10.0%) (15.0%) Implied Gain/Loss versus Current Price: 2.7% 100 (20.0%) Alternative: 2017 EPS $ x $11.09 Dividends $ x $0.31 Combined $11.39 Tang.Book Dec-17 $ x $11.39 Discount Factor 10% Pro Rata To Yr-End (25.0%) (30.0%) (35.0%) Price Target $11.25 Source: FIG Partners Research & Forward Estimates Through 2017 RF Relative 2015A 2016E 2017E Shares Repurchased Buyback Price $10.02 $9.20 $11.97 Buyback Amount - $$ Buyback Shares % of O/S 4.2% 6.1% 5.2% DIV & Repurchase % of NI 87% 96% 99% Dividends % of Net Income 30% 29% 32% We previously factored over $750 Mil. in buybacks in Calendar 2017, so RF s increased authorization was not a surprise and our model only adjusts about $12 Mil. more buybacks and therefore barely changes our EPS outlook. The return of capital via buybacks and cash dividends should be almost 100% in both 2016 and again in See more details in our EPS Model on Page 5. We increased our Price Target to $11.25, and recently we continue to be incorrect on the capacity for the stock to trade at a higher multiple of forward EPS and tangible book value. 3

4 EPS Outlook: FIG vs. Street Consensus FIG remains $0.03 above the Street consensus for 2017 and a penny stronger for 4Q16. See our two tables to the right. Our differences are slightly more provision and better Fee Income progress with stronger spread income on more earning assets. Expenses are just below consensus and we feel RF is able to meet its lower cost pledges made in the recent past (and echoed again on the 10/18 investor conference call). Regions Financial Corporation (RF) Updated on 11/8/ Y Income Statement FIG Estimate Mean Consensus Ex-FIG High Low Net Interest Income (000) $3,492,473 $3,445,091 $3,441,932 $3,568,000 $3,308,900 Net Interest Margin 3.09% 3.07% 3.07% 3.12% 3.00% Loan Loss Provision (000) $354,254 $316,814 $314,474 $454,000 $192,000 Non-Interest Inc ome (000) $2,226,368 $2,194,313 $2,192,176 $2,328,000 $2,048,000 Non-Interest Expense (000) $3,568,276 $3,589,568 $3,590,899 $3,898,000 $3,491,000 Pre-Tax Inc ome (000) $1,769,311 $1,712,217 $1,708,410 $1,863,000 $1,560,500 Net Inc ome (000) $1,134,708 $1,123,623 $1,122,884 $1,226,000 $1,030,500 Diluted Shares Outstanding (M) 1, , , , ,183.6 Earnings Per Share $0.95 $0.92 $0.92 $1.04 $ Q4 2016FQ4 2017Q1 2017FQ1 FIG Est. Consensus FIG Est. Consensus EPS Net Interest Inc. 866, , , ,403 NIM-Net Int. Margin Non-Interest Fees 548, , , ,000 Non-Interest Exp. 900, , , ,000 Loan Loss Prov. 80,772 64,491 81,425 70,034 Net Charge-Offs % Pre-Tax Inc. 433, , , ,000 Net Income 294, , , ,490 LOANS (Median) 80,235,542 81,287,000 80,797,191 81,701,000 Tang. Book Value $9.52 $9.42 $9.65 $9.57 ROA-Return on Assets Source: FIG Partners Research, SNL Financial & FactSet consensus data 4

5 RF Trades 1 P/E Multiple Point Below Peer Regional Banks Company Name Price ($) Market Cap. ($M) Current Dividend Yield (%) Total Assets ($000) DDA & NOW % CDs % of Total Cost of Deposits TCE Ratio Core Deposit Premium Price-to- T.Book P/E 2017 EPS ROA Forecast in 2017 ROTCE Estimated in 2017 MRQ MRQ MRQ MRQ MRQ Today 11/7/16 Co ns ens us Co ns ens us Co ns ens us Peer Analysis: RF Regions Finl Corp $10.96 $13, $125,177, % x % BAC Bank of America $17.01 $171, $2,195,314,000 NA NA na x % BBT BB&T Corp. $39.34 $31, $222,622, % x % CMA Comerica Inc $52.00 $8, $74,124,000 NA % x % FHN First Horizon Natl $15.57 $3, $28,449,222 NA % x % FITB Fifth Third Bnc p $21.90 $16, $143,279, % x % FRC Frst Rep Bk $74.76 $11, $67,993, % x % HBAN Huntington Bcshrs $10.45 $11, $100,765, % x % JPM JPMorgan Chase $69.88 $250, $2,521,029, % x % KEY KeyCorp $14.54 $15, $135,805,000 NA % x % MTB M&T Bank Corp $ $19, $126,841, % x % NYCB NY Community Bnc p $13.98 $6, $49,462, % x % PBCT People's United $16.73 $5, $40,692,100 NA % x % PNC PNC Financ ial $96.40 $46, $369,348, NA na x % SNV Synovus Finl Corp $33.68 $4, $29,727, % x % STI SunTrust Banks Inc $46.18 $22, $205,091, % x % USB US Bancorp $44.92 $76, $454,134, % x % WFC Wells Fargo & Co $45.40 $228, $1,942,124, % x % ZION Zions Bancorp $32.25 $6, $61,038, % x % Source: FIG Partners Research, SNL Financ ial LC Median % x % Background & Risks Regions Financial is a $125 Billion (Total Assets) regional bank based in Birmingham, AL. The company does business in 16 states in the South, Midwest, and Texas. Company has 1,630 retail banking offices and 2,000 ATMs. The merger with AmSouth was completed November 2006 and previously Union Planters was acquired in July The company sold its broker/dealer Morgan-Keegan in Spring 2012 to Raymond James Financial. Since May 2009 when the company recapitalized itself to repair credit issues, RF has managed its tangible book value per share to be higher at $9.38 per share as of versus $7.58 in June Since raising additional capital to repay TARP in Spring 2012, tangible book value per share has increased about 50%. We see primary Risks to include (1) adverse earnings impact from poor credit quality; (2) negative impact from persistent low interest rates and/or a flattening yield curve environment; and (3) significant slowdown in residential mortgage lending. 5

6 Regions Financial Corporation (RF) Updated on 11/8/16 Updated on 11/8/16 Earnings Model 2015 Quarterly 2016 Quarterly 2016 Quarterly 2015A 2016E 2017E 1Q15A 2Q15A 3Q15A 4Q15A 1Q16A 2Q16A 3Q16A 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E Income Data: ($ in Millions) Net Interest Income (FTE) $3,307.0 $3,411.2 $3,492.5 $815.0 $820.0 $836.0 $836.0 $862.0 $848.0 $835.0 $866.2 $849.9 $867.7 $884.7 $890.1 Loan Loss Provision $241.0 $294.8 $354.3 $49.0 $63.0 $60.0 $69.0 $113.0 $72.0 $29.0 $80.8 $81.4 $84.4 $91.3 $97.1 Non-Interest Income $2,042.0 $2,121.5 $2,226.4 $465.0 $584.0 $490.0 $503.0 $511.0 $520.0 $542.0 $548.5 $543.0 $553.3 $561.6 $568.4 Gain/Loss on Loan Sales $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Gain/Loss on Securities $29.0 $58.0 $0.0 $5.0 $6.0 $7.0 $11.0 ($5.0) $6.0 $57.0 $0.0 $0.0 $0.0 $0.0 $0.0 One-Time Items ($99.0) $0.0 ($27.0) ($65.0) ($27.0) ($1.0) ($6.0) $0.0 $0.0 $0.0 $0.0 ($6.0) ($7.0) ($7.0) ($7.0) Non-Interest Expense $3,508.0 $3,618.4 $3,568.3 $840.0 $907.0 $894.0 $867.0 $869.0 $915.0 $934.0 $900.4 $895.9 $891.4 $890.5 $890.5 Pre-Tax Income $1,530.0 $1,677.6 $1,769.3 $331.0 $413.0 $378.0 $408.0 $386.0 $387.0 $471.0 $433.6 $409.7 $438.3 $457.5 $463.9 Taxes (w/ FTE adj.) $455.0 $518.8 $570.6 $95.0 $124.0 $116.0 $120.0 $113.0 $115.0 $152.0 $138.8 $132.1 $141.3 $147.5 $149.6 Extraordinary Items $0.0 $0.0 $0.0 $2.0 $2.0 $4.0 $3.0 $0.0 ($3.0) ($1.0) $0.0 $0.0 $0.0 $0.0 $0.0 Net Income $1,075.0 $1,158.9 $1,198.7 $234.0 $287.0 $258.0 $285.0 $273.0 $275.0 $320.0 $294.9 $277.6 $296.9 $309.9 $314.3 Preferred Dividend $64.0 $64.0 $64.0 $16.0 $16.0 $16.0 $16.0 $16.0 $16.0 $16.0 $16.0 $16.0 $16.0 $16.0 $16.0 Net Income Avail. To Common $1,011.0 $1,094.9 $1,134.7 $218.0 $271.0 $242.0 $269.0 $257.0 $259.0 $304.0 $278.9 $261.6 $280.9 $293.9 $298.3 Avg. Shares O/S 1, , , , , , , , , , , , , , ,172.3 Earnings Per Share (EPS) $0.75 $0.87 $0.95 $0.16 $0.20 $0.18 $0.21 $0.20 $0.20 $0.24 $0.23 $0.21 $0.23 $0.25 $0.25 Per Share Data: Reported Book Value $12.35 $13.58 $14.34 $12.05 $12.06 $12.36 $12.35 $12.86 $13.16 $13.39 $13.58 $13.76 $13.95 $14.14 $14.34 Tangible Book Value $8.46 $9.52 $10.08 $8.39 $8.37 $8.58 $8.46 $8.90 $9.22 $9.38 $9.52 $9.65 $9.79 $9.93 $10.08 Dividends $0.230 $0.255 $0.305 $0.050 $0.060 $0.060 $0.060 $0.060 $0.065 $0.065 $0.065 $0.065 $0.080 $0.080 $0.080 Pre-Tax, Pre-Provision EPS $1.38 $1.52 $1.80 $0.30 $0.36 $0.33 $0.36 $0.39 $0.36 $0.35 $0.42 $0.41 $0.44 $0.47 $0.48 CORE GAAP EPS $0.79 $0.84 $0.96 $0.19 $0.21 $0.18 $0.20 $0.20 $0.20 $0.21 $0.23 $0.22 $0.24 $0.25 $0.26 KEY Ratios: Net Interest Margin 3.14% 3.12% 3.09% 3.18% 3.16% 3.13% 3.08% 3.19% 3.15% 3.06% 3.09% 3.08% 3.09% 3.10% 3.10% Return on Avg Assets 0.88% 0.92% 0.94% 0.78% 0.95% 0.84% 0.91% 0.87% 0.88% 1.02% 0.93% 0.88% 0.93% 0.97% 0.98% Return on Avg Equity 5.97% 6.43% 6.86% 5.14% 6.40% 5.74% 6.37% 6.02% 6.04% 7.03% 6.74% 6.33% 6.80% 7.11% 7.21% Pre-Tax Pre-Provision ROA 1.51% 1.52% 1.69% 1.39% 1.61% 1.39% 1.49% 1.62% 1.45% 1.40% 1.62% 1.58% 1.66% 1.72% 1.74% Efficiency Ratio 63.7% 63.6% 60.6% 63.7% 62.8% 65.5% 62.9% 61.5% 65.1% 66.0% 61.9% 62.5% 61.0% 59.8% 59.3% Overhead Ratio 2.87% 2.88% 2.80% 2.79% 3.00% 2.91% 2.78% 2.76% 2.92% 2.97% 2.85% 2.83% 2.80% 2.78% 2.77% TCE/TA 9.38% 9.56% 9.52% 9.59% 9.52% 9.34% 9.07% 9.42% 9.57% 9.65% 9.62% 9.58% 9.53% 9.49% 9.47% Period-End Balances: ($ in Millions) $399 $96 $479 Earning Assets $110,519 $111,299 $112,375 $109,810 $109,264 $111,280 $111,723 $111,453 $111,747 $110,832 $111,164 $111,554 $112,089 $112,672 $113,185 Total Assets $123,785 $125,620 $126,919 $122,447 $121,855 $124,789 $126,050 $125,539 $126,212 $125,177 $125,553 $125,992 $126,597 $127,255 $127,834 Net Loans $79,046 $80,250 $81,751 $77,145 $79,034 $79,948 $80,056 $80,455 $80,551 $79,757 $80,236 $80,797 $81,444 $82,095 $82,670 Total Deposits $97,540 $98,618 $101,039 $97,477 $97,075 $97,178 $98,430 $98,154 $97,245 $99,289 $99,785 $100,284 $100,786 $101,290 $101,796 Intangibles $4,951 $4,973 $4,927 $4,915 $4,914 $4,926 $5,048 $5,040 $4,960 $4,949 $4,943 $4,937 $4,930 $4,924 $4,918 Total Common Equity $16,093 $16,511 $16,539 $16,183 $16,047 $16,116 $16,024 $16,391 $16,565 $16,545 $16,544 $16,535 $16,526 $16,538 $16,555 Source: FIG Partners Research, SNL Financial LC

7 Distribution of Ratings Buy / Outperform Hold / Market- Perform Sell / Underperform % Rated 36.0% 63.2% 0.8% IB Client % in Category 31.1% 15.2% 0.0% Equity Rating System as of July 1, 2003 Buy/Outperform O FIG expects that total return of the subject stock will outperform the industry benchmark (BIX) over the next 12 months Hold/Market-Perform M-P FIG expects that total return of the subject stock will perform inline with the industry benchmark (BIX) over the next 12 months Sell/Underperform U FIG expects that total return of the subject stock will under perform the industry benchmark (BIX) over the next 12 months For purposes of FINRA rule 2711, outperform is classified as a buy, market perform is a hold and underperform is a sell. The industry benchmark that we use is the S&P Bank Index referred to as the BIX. Ratings Changes for Regions Financial Corporation (RF) M Additional Risks to Our Earnings Model Assumptions & Ratings: Unexpected and/or rapid changes in interest rates may have significant negative impact on the company s balance sheet. Likewise, persistently low interest rates, and/or a flat yield curve may add downward pressure to revenues and the absolute level of NIM-Net Interest Margin. Declines in asset quality beyond our estimates due to an economic slowdown in the company s operating footprint may require increased expenses for loan losses which could decrease profitability. Further, this may cause an increase in Net Charge-offs, Nonperforming loans, and Classified Assets. U New rules set forth by regulatory agencies could reduce future profitability by eliminating certain revenue items, adding additional expenses, or requiring this institution to hold more capital. A similar effect is possible if new legislation (local, state, or federal) is passed. Any regulatory action or litigation against the company could impact future earnings and also affect the public market perception towards this stock. 7

8 Compliance Neither the research analyst nor any member of the analyst s household has any financial interest in the subject company. At the prior month end, neither nor any of its partners or officers owned more than 1% of the outstanding equity securities of the subject company. There are no material conflicts of interest of the analyst or at the time of this report. FIG has not been a manager or co-manager of a public offering of any securities of the recommended issuer within the last 12 months. FIG has not received investment banking compensation from the subject company in the last 12 months. FIG intends to seek investment banking compensation from the subject in the next three months. The subject company is a client of FIG. Neither the analyst nor anyone at FIG serves as an officer, director, or advisory board member of the subject company. FIG may usually make a market in the subject security but was not making a market in this security at the time of this report s publication. All analysts are compensated based on a number of factors including the overall profits of which includes investment banking revenues, but no analyst receives any compensation which is based on a specific investment banking service or transaction. To determine price target, our analysts utilize a variety of valuation techniques including but not limited to: peer analysis, absolute P/E, relative P/E, projected P/E, absolute P/B, relative P/B, projected P/B, deposit premium, and a discounted cash flow model. This research report reflects the analyst s actual opinion. No research analyst is subject to the supervision or control of any employee of the member s investment banking department. No employee of the investment banking department has reviewed or approved this report prior to publication The report has not been approved by the subject company, but may have been reviewed for factual accuracy except for the research summary, research rating and price target. The subject company has not promised directly or indirectly favorable research, a specific rating or a specific price target nor has the subject company been threatened with a change in research as an inducement for business or compensation. Additional information is available by request. The information contained herein has been prepared from sources and data we believe to be reliable but we make no representation as to its accuracy or completeness. The opinions expressed herein are our own unless otherwise noted and are subject to change without notice. The price and value of the securities mentioned herein will fluctuate; past performance is no guarantee of future results. This report is published solely for informational purposes and should not be construed as an offer to buy or sell, or a solicitation of an offer to buy or sell, any security. The securities discussed herein are not suitable for everyone; each investor should assess his or her own particular financial condition and investment objectives before making any investment decisions. may act as principal for its own account or as agent for both buyer and seller in connection with the purchase or sale of any security discussed herein. Reproduction or redistribution of this report in any form is prohibited except with the written permission of. The author is employed by, a broker-dealer. Data sources for the report are Bloomberg Financial L.P., SNL Financial LC, Stockcharts.com, Thompson Financial and regulatory filings. 8