Why Regions Financial Could Head Even Higher

Shares of Regions Financial (NYSE: RF  ) hit a 52-week high on Monday. Let's take a look at how it got there and see if clear skies are still in the forecast.

How it got here
It might seem counterintuitive to proclaim that at a new high, Regions Financial could head even higher (you could have purchased the stock for below $3 less than a year ago), but sometimes you just don't know if a company has turned the corner until well after its results have indicated as much.

Such is the case with Regions Financial, which is finally putting the pieces back together after the residential mortgage meltdown nearly left the company belly up. In Region's most recent quarter, the company noted a seven-basis-point expansion in net interest margin, a 28% increase in mortgage loan dollar volume, and, most importantly, an 11% reduction in non-performing loans, as well as 93% reduction in money set aside for future loan losses versus the previous year. This by no means puts the bank on safe ground or puts it on par with its peers, but it's a strong step in the right direction.

The other catalyst sending shares higher is the fact that Regions was finally able to pay back the $3.5 billion it had borrowed from the U.S. Treasury under the TARP program. In previous years, regulators had discouraged Regions from paying back the loan due to its shaky balance sheet. However, Regions' sale of its investment banking unit, Morgan Keegan, to Raymond James Financial (NYSE: RJF  ) for $1.2 billion, coupled with the $900 million it raised through share offerings, allowed it to repay its TARP obligations. With TARP out of the way, Regions is free to seek merger opportunities and may potentially be able to raise its dividend (which currently yields 0.6%).

How it stacks up
Let's see how Regions Financial compares to its peers.

RF Chart

RF data by YCharts.

In terms of banks operating in the southeastern United States, both Wells Fargo (NYSE: WFC  ) and BB&T (NYSE: BBT  ) have significantly outperformed both Regions Financial and Bank of America (NYSE: BAC  ) , both of which have had an untold number of issues.

Company

Price/Book

Forward P/E

Dividend Yield

Regions Financial

0.7

10.0

0.6%

BB&T

1.2

10.1

2.3%

Wells Fargo

1.3

9.1

2.0%

Bank of America

0.4

8.3

0.5%

Source: Morningstar.

Wells Fargo is possibly the best example of a strong large bank. It has generally avoided the toxic loan fallout and legal issues that have plagued the remainder of the banking sector. Similarly, BB&T boasts the highest yield of these four banks at 2.3%, and its improving credit quality led to a 66% hike in net income in its latest quarter.

Prudent lending was not on the docket, however, for Regions or Bank of America. Both companies have taken to shedding assets in order to boost liquidity and shareholders have had their dividends sacrificed almost in their entirety in the process. Bank of America disposed of $8.3 billion worth of China Construction Bank last year, among its other capital-raising acts, in order to shore up its balance sheet. As I discussed above, Regions has also been in non-core-asset-dumping mode in order to eliminate its TARP loans and lessen its regulatory obligations.

What's next
Now for the $64,000 question: What's next for Regions Financial? The answer really depends on whether the company can reinvigorate traditional growth paths (deposits, loans, and service fees) now that its TARP obligations are out of the way, and if the bank attracts merger or buyout interest.

Our very own CAPS community gives the company a three-star rating (out of five), with 80.5% of members expecting it to outperform. Although I've yet to make a CAPScall in either direction on Regions Financial, I'm ready to rectify that now by placing a call of outperform on the stock.

Yes, even at a 52-week high I see plenty of potential in Regions Financial. Slowly, but surely, the company's charge-offs and non-performing assets are falling, and tradition ally safe banking activities are increasing. Regions won't be without its own set of challenges, which still include $1.9 billion worth of non-performing assets on its books, as well as near record-low interest rates that are making it difficult for banks to earn much on their investments. Still, repaying TARP was a gigantic hurdle for Regions to overcome, and even if the company finds no merger or buyout interest, it should be able to focus on improving its business and boosting its dividend over the coming years. There's no reason Regions Financial can't trade for its book value in my opinion.

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Craving more input on Regions Financial? Start by adding it to your free and personalized Watchlist. It's a free service from The Motley Fool to keep you up to date on the stocks you care about most.

Fool contributor Sean Williams owns shares of Bank of America, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

Motley Fool newsletter services have recommended buying shares of Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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