Will Expense-Control Efforts Drive Regions (RF) Q4 Earnings?

Regions Financial Corporation RF is scheduled to report fourth-quarter 2017 results tomorrow, before the opening bell. Both revenues and earnings are anticipated to grow year over year, with likely earnings beat on the cards.

Before we discuss why an earnings beat is likely and what could influence the results, let’s take a look at how the company performed in the last quarter.    

This Birmingham, AL-based company’s third-quarter 2017 earnings were in line with the Zacks Consensus Estimate. Easing margin pressure and lower expenses were the positive factors. Decline in non-interest income, along with lower loans and deposits balance, were the undermining factors. Moreover, provisions escalated in the quarter.

Notably, post earnings, an appreciation in the company’s share price were recorded. For the three-month period ended Dec 31, 2017, the stock gained around 13.5%.

Also, the Zacks Consensus Estimate remained unchanged at 26 cents over the last 30 days, reflecting a year-over-year improvement of nearly 13%. The Zacks Consensus Estimate for sales of $1.45 billion indicates around 5.2% growth from the prior-year quarter.

In addition, Regions is expected to record slight decline on a sequential basis in average interest-earning assets as the Zacks Consensus Estimate for the to-be-reported quarter is $108.8 billion.

Regions has an impressive earnings surprise history, as evident from the chart below:
 

Regions Financial Corporation Price and EPS Surprise

Regions Financial Corporation Price and EPS Surprise | Regions Financial Corporation Quote

Will the upcoming earnings release give a boost to Regions’ stock? This depends largely on whether the firm is able to post a beat in the fourth quarter. Notably, our quantitative model predicts likely earnings beat this time. Here’s why:

Our proven model indicates that chances of Regions beating the Zacks Consensus Estimate is high as it has the right combination of the two key ingredients — positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold).

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently pegged at +0.83%. This is a very significant and leading indicator of a likely positive earnings surprise for the company.

Zacks Rank: The combination of Regions’ Zacks Rank #1 and a positive ESP makes us confident of an earnings beat.

Factors to Influence Q4 Results

Loan Growth: Per the Federal Reserve’s latest data, loans declined on a sequential basis during the December-end quarter. Particularly, growth in consumer loans, with slowdown in real estate loans, along with commercial and industrial (C&I) loans, is expected. Therefore, interest income for banks is projected to improve marginally.

In addition, management’s expectations of loan and deposit growth in 2017 will likely be reflected in this quarter. The bank projects average loans to be marginally down on a year-over-year basis, excluding the impact of the third-party indirect-vehicle portfolio.

Modest Rise in Net Interest Income (NII): Given the effect of rise in interest rates, Regions is expected to have recorded an increase in NII. Notably, management’s projections of the 2017 NII and other financing income to grow in the range of 3-5% are likely to show impact in the fourth quarter as well. For Q4, excluding the influence of interest recoveries, net interest income and net interest margin are likely to grow modestly in line with market expectations for the December Fed funds rate increase.

Non Interest Income Might Escalate: The persistent decline in non-interest income has weighed on the top line for the last few years. Nevertheless, adjusted non-interest income is estimated to remain stable. Management expects a pick-up in capital markets revenues, along with modest growth in wealth management, mortgage and card, and ATM fees to contribute to overall growth in adjusted non-interest income during the quarter under review.

Notably, the Zacks Consensus Estimate for capital market revenues is estimated to improve 9.4% sequentially to $38.3 million, while commercial credit fee income is projected to increase 6.5% to $18.1 million.

Expenses Might Rise Slightly: Regions’ efficient expense management might decently support the bottom line during the quarter. Notably, the company is on track for a $400-million expense reduction by 2019, with mostly to be achieved by 2017. While investing in revenue-generating areas, the company intends to keep expenses from stable to a marginally elevated level.

Adverse impact of new tax code: The tax reform might result in elevated operating expenses from one-time bonus payments, higher charitable contributions and investment losses from securities portfolio restructurings. Also, though the company has not provided any information about the write-down of deferred tax assets (DTAs), it might record a significant one-time charge in the quarter.

Stocks That Warrant a Look

Here are some other stocks you may want to consider, as according to our model, these have the right combination of elements to post an earnings beat this quarter.

The Earnings ESP for Legg Mason, Inc. LM is +0.18% and the stock has a Zacks Rank of 2. The company is scheduled to release December quarter-end results on Jan 24. You can see the complete list of today’s Zacks #1 Rank stocks here.

T. Rowe Price Group, Inc. TROW is slated to release results on Jan 30. The company has an Earnings ESP of +1.49% and carries a Zacks Rank of 2.

SunTrust Banks, Inc. STI has an Earnings ESP of +0.81% and holds a Zacks Rank of 2. It is scheduled to report results on Jan 19.

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SunTrust Banks, Inc. (STI) : Free Stock Analysis Report
 
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