Of the banks that investors can jump in on right now, Regions Financial (NYSE:RF) is definitely among the riskiest.
One of the regionals that had a particularly tough time during the financial crisis and housing downturn, Regions is still in the process of limping back to life and rehabbing its balance sheet. While that doesn't mean that Regions should be written off entirely -- in fact, its current low valuation is at least one good reason to have it on your radar -- it does mean that investors will want to keep a close eye on the bank.
In particular, Regions investors better make sure to watch these three areas.
Regions has been slower than other banks to clear itself of the toxic loans of yesteryear. Its percentage of non-performing assets (bad loans and foreclosures) is near 3%. This is down from almost 5% a few years ago, but that's an improvement from a poor position.
Right now, healthier competitors are seeing non-performing assets well below 2% -- US Bancorp (NYSE:USB) and Huntington Bancshares (NASDAQ:HBAN), for instance are both at 1.3%. We'll want to see this number continue to go down. However, know that an improved economy (and flush borrowers) can mask trouble.
As Regions tries to get more conservative, it's been paring down its loan portfolio, including shedding risky construction and real estate investment loans. Until 2009, Regions actually had more loans than deposits, peaking at 111%. Going over 100% generally isn't wise because it forces a bank to use more expensive funding than deposits, but at its current 79%, Regions has a little room to move up.
What we want to watch as Regions goes about this is to make sure it is properly balancing generating more loan business and conservatively lending. The percentage of bad debts and earlier warning signs like early stage delinquencies can help us make sure the lending is conservative. The next metric can help us assess profitability.
Net interest margin
With the headwinds of slimming down its loan portfolio and working through bad loans (which collect no interest), Regions' net interest margin is an anemic 3.1%. The bank also blames some of this on higher-cost funding, but its total cost of borrowing is a quite reasonable 1%.
Given Federal Reserve actions under QE3, long-term interest rates are being pressured, so banks of all stripes are having problems generating high interest rates on their loans. So although short-term interest rates also remain low thanks to the Fed, net interest spreads are being squeezed.
That said, Regions' 3.1% net interest margin is low on a relative basis with the industry, which is more like 3.5%. And better performers are around 4%. This is certainly an area we'll want to see improvement in.
Anand Chokkavelu, CFA, owns shares of Huntington Bancshares. The Motley Fool owns shares of Huntington Bancshares. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.