We have reaffirmed our Neutral recommendation on Regions Financial Corp. (RF) based on its fundamentals, the recent sale of Morgan Keegan and the repayment of the bailout money.
Fourth Quarter Results
Regions’ fourth-quarter 2011 earnings from continuing operations of 9 cents per share marginally surpassed the Zacks Consensus Estimate. Results benefited from improved net interest margin and better credit quality, backed by lower loan loss provisions and reduced non-performing assets.
TARP Repayment and Morgan Keegan Sale
Only last week, Regions became one of the latest banks to repay the bailout money it had taken from the government during the latest financial crisis. The company repurchased $3.5 billion of its Series A Preferred Stock, which was issued to the U.S. Department of the Treasury as part of the company’s participation in the Troubled Asset Relief Program’s (:TARP).
Regions funded the repayment with proceeds from the recent $900 million common stock offering, in addition to the $1.2 billion received on completing the sale of its securities brokerage arm, Morgan Keegan & Company Inc. to Raymond James Financial Inc. (RJF) early last week. The company also used its other available funds for the bailout repayment. Following the divestiture, Regions aims to concentrate on its core banking business while providing products and services to its clients in a better way.
The TARP loan repayment is essentially a positive for Regions. On an annual basis, the repurchase of stock helps the company to get rid of the dividend payment of $175 million on these securities. Moreover, it removed the restrictions on both financial and executives’ pay package flexibility that the company was subject to, upon being a TARP participant.
We believe Regions’ favorable funding mix, improved core business performance and its expansion mode will continue to yield profitability in the upcoming quarters. Additionally, improved credit quality and TARP repayment would act as positive catalysts.
While the de-risking measures at Regions are encouraging, the upfront costs of such initiatives cannot be avoided. Moreover, the company still has significant exposure to risky assets.
Also, regulatory issues remain a major area of concern. The financial reform law is expected to demand more stringent capital, liquidity and leverage ratio, which will limit the company’s ability to pursue business opportunities by imposing additional costs and restricting fees. Also, management anticipates significant negative revenue impact from the Durbin Amendment in 2012.
Hence, the risk-reward profile for Regions seems balanced and therefore, we have reiterated our Neutral recommendation on the stock.
Regions currently retain a Zacks #2 Rank, which translates into a short-term Buy rating.
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