Like many large regional banks in 2008, Regions Financial (RF -0.81%) got hit hard by poorly underwritten mortgage and homebuilder loans that sent loan losses surging and shareholders running for the hills. The bank's stock dropped from almost $38 in 2006 to briefly below $3 at one point in 2009.
But more than a decade later, Regions is in a very different place. It has won back the approval of its shareholders and achieved a premium valuation. In 2022, the stock only fell slightly for the year, soundly beating the broader market and banking sector.
And today, Regions is coming off excellent fourth-quarter results and looks very well positioned for the current environment. It truly has been a remarkable turnaround for Regions since the Great Recession.
Taking advantage of the Southeast market
Regions has good market share in many states in the southeastern part of the U.S., which are experiencing some of the fastest population growth in the U.S. Regions CEO John Turner noted on the bank's fourth-quarter earnings call that within Regions' footprint, there are roughly two job openings for each unemployed person.
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In recent years, CFO Dave Turner noted that the bank's lower-income consumers, those with less than $1,000 in their bank accounts, have been buoyed not just by economic stimulus measures, but also by more permanent changes like minimum wage increases and overall better spending behavior. For the cohort of customers that had less than $1,000 in their bank accounts before the pandemic, average balances are up sixfold. Management has been tracking this cohort every month and it hasn't seen a change.
But management has also made investments in its people and technology, as well as bolt-on acquisitions that really strengthened the franchise. Additionally, the bank has embraced more responsible growth and maintained strong liquidity, which has really bolstered its balance sheet.
Despite the Federal Reserve's quantitative tightening program, which is pulling liquidity out of the economy and draining deposits from the banking system, close to 39% of Regions' total deposits are non-interest-bearing, meaning the bank pays no interest on them. Total loans grew 2.4% in the fourth quarter and 10.5% in 2022, driven by Regions' strong commercial lending franchise. In the fourth quarter, Regions generated an extremely impressive return on average tangible common equity of more than 33%.
Well positioned for what's to come
A lot of banks are preparing for more deposit outflows as deposit pricing continues to catch up with higher interest rates and pressures their net interest margin (NIM). The NIM essentially looks at the difference between what banks make on interest-earning assets such as loans and pay out on interest-bearing liabilities such as deposits. Regions is not totally immune from sector headwinds but does seem to be more insulated than most of the industry.
The bank expects another $3 billion to $5 billion rundown in non-interest-bearing deposits this year, but it doesn't expect to have to bring a significant amount of higher-cost wholesale borrowings to fund what it still expects to be a decent year of loan growth. That's because Regions has maintained strong liquidity and still has lots of deposits well in excess of its current loans, which gives the bank more flexibility.
Furthermore, the bank expects net interest income (NII), the money banks make on loans and deposits after funding those assets, to grow 13% to 15% this year, with no slowdown in the current quarter. Many large banks do expect to see declines in NII early this year due to fast-rising deposit costs before a rebound later in the year.
Credit quality is still holding up quite nicely, and management only expects the net charge-off rate -- debt unlikely to be collected as a percentage of total loans and a good indicator of loan losses -- to end the year between 0.25% and 0.35%. The company's allowance for loan losses is at a healthy 1.63% of total loans, and the bank is also holding much more capital than it is required to by regulators, so if there are unexpected loan losses it should be able to easily handle them.
Because of its exposure to interest rates, Regions also employs a very active hedging strategy, in which it purchases various derivative instruments to make its balance sheet less sensitive to interest rate moves. The bank's NIM just hit 3.99%, its highest level in 15 years. Management has structured its hedging program so the margin will stay in the 3.6% to 4% range in future years even if the Fed suddenly has to drop interest rates to 1%.
What a transformation
It's clear that the work Regions' management team has done over the last decade-plus is paying off. The bank's deposit base is outperforming, its lending franchise is taking advantage of its attractive markets, and its credit quality is very clean right now. The bank is also prudently reserving for future loan losses and has a lot of excess capital.
Furthermore, management has done an excellent job of managing its balance sheet in terms of liquidity and the hedging program, which protects it in different interest rate environments.
Following the Great Recession, Regions traded around its tangible book value or net worth. Today, it trades at almost 300% to its tangible book value, which is impressive considering the uncertain economic environment. The market clearly appreciates the remarkable transformation by the bank.
