Regions Financial Corporation (RF) in Birmingham, Ala., is one of the nation’s largest full-service providers of consumer and commercial banking, wealth management, and mortgage products and services. It caters to customers in the South, Midwest, and Texas, and operates more than 1,300 banking branches and 2,000 ATMs.

RF’s stock has soared 82% in price over the past year and 21.8% over the past month to close yesterday’s trading session at $23.28, driven by the company’s strategic acquisitions and competitive edge in delivering real-time financing, seamless loan applications, and a prudent approach to risk management.

However, RF’s loan operations look uncertain. The bank's loan-to-deposit ratio is 63.9% currently, implying that only around two-thirds of the bank's deposits have been used to issue loans. Furthermore, the company’s total revenue declined 2% year-over-year to $1.58 billion in the second quarter, ended June 30, 2021. In addition, analysts have reduced their estimates for the company’s forthcoming third-quarter earnings report. So, we think these factors combined could impact RF’s current price rally.

Here’s what we think could shape RF’s performance in the near term:

Strategic Acquisition

This month, RF completed the acquisition of EnerBank USA, a home improvement lender. EnerBank brings $2.8 billion in high-quality loans, which are projected to provide solid margins for RF once the bank applies its lower-cost deposits to the business. In addition, according to RF, the addition of EnerBank's exceptional team and leading technologies will enable it to provide even more value to consumers looking for simple, competitive alternatives for financing home renovations.

Stretched Valuation and Poor Growth Estimates

In terms of forward Price/Sales, the stock is currently trading at 3.53x, which is 1.8% higher than the 3.47x industry average. Also, its 1.33x forward Price/Book multiple is 8.2% higher than the 1.23x industry average. Furthermore, RF’s 10.65x trailing-12-months Price/Cash Flow is 18.8% higher than the 8.96x industry average.

A $0.48 consensus EPS estimate for the next quarter (ending December 2021) indicates a 21.3% decline year-over-year. Analysts expect RF’s EPS to decrease 17.5% year-over-year to $1.98 next year.

Strong Profitability

RF’s 37.2% trailing-12-months net income margin is 24.3% higher than the 30% industry average. Also, its 19.1% and 28.3% respective ROC and ROA are higher than the industry averages. And its $2.11 billion cash from operations is significantly higher than the $131.62 million industry average.

POWR Ratings Reflect Uncertainty

RF has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. RF has a C grade for Value and Growth. The company’s higher-than-industry valuations are in sync with the Value grade. In addition, the stock’s poor EPS estimates are consistent with the Growth grade.

Of the 28 stocks in the C-rated Southeast Regional Bank industry, RF is ranked #11.

Beyond what I’ve stated above, one can view RF ratings for Stability, Sentiment, Momentum, and Quality here.

Bottom Line

RF has exhibited solid momentum over the past few months. However, the decline in analyst estimates for the company’s impending third-quarter earnings report indicates weakness. In addition, given the company’s premium valuation and weak growth estimates, we believe investors should wait until its prospects improve before investing in the stock.

How Does Regions Financial Corporation (RF) Stack Up Against its Peers?

While BKR has an overall C rating, one might want to consider looking at its industry peer, Peoples Bancorp of North Carolina Inc. (PEBK), Popular Inc. (BPOP), and Colony Bankcorp Inc. (CBAN), having an overall B (Buy) rating.

RF shares rose $0.32 (+1.37%) in premarket trading Friday. Year-to-date, RF has gained 47.71%, versus a 22.51% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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