3 Reasons to Sell Regions Financial

For those of us that tend to focus on the financial sector, we tend to keep an eye on certain banks and financial companies. A lot of the focus tends to gravitate toward megabanks like JPMorgan Chase (JPM 1.97%) and Bank of America (BAC 3.29%), the two largest banks in the country. This focus is warranted, as moves that both make can have major impacts on the sector and financial markets as a whole. Nevertheless, there are numerous smaller banks at the regional level that warrant attention.

One regional bank that garners a lot of attention is Alabama-based Regions Financial (RF -1.24%). Earlier this month, I provided three reasons to buy Regions. Today, I'll put on my bear hat and provide three reasons why you should consider selling the bank if you currently own shares.

1. Based in the Southeast U.S.
Regional banks are often seen as an enticing option because they are usually focused on a smaller part of the country, allowing them to fully immerse themselves in local culture and customs. Their smaller size can also prevent them being able to take part in some of the riskier investments available to the much larger national banks. But this regional focus can also be a severe negative depending on the region that the bank is based.

While Regions has returned to more traditional banking operations during its recent recovery, it is still primarily located in one of the worst performing regions in the United States. Over the past few months, many states in the region reported higher unemployment than the national average:

Source: Bureau of Labor Statistics. 

The differences aren't that dramatic, but when the majority of its business is in the four states above, it is difficult for any bank to monetize accounts if their customers are not working and making any money. Higher margin offerings, like mortgages and investment services, might be unavailable to more customers, making it difficult for the bank to make any money.

2. Size is a disadvantage
Regions Financial is not a small bank relative to a lot of other regional banks out there; it boasts over $120 billion in total assets  and a market cap of around $10 billion. However, its size may preclude it from using smart acquisitions and mergers to grow, which could hamper its growth potential in the coming years. It's not quite large enough, or stable enough financially, to make any large acquisitions, but it is also too large to be acquired by another bank looking to expand its operations to the Southeast.

Smaller regional banks often pop up as targets of acquisitions. This year, Hudson City Bancorp (NASDAQ: HCBK), with a market cap of $4.4 billion, was acquired by M&T Bank (MTB 2.37%), a bank not much larger than Regions. There was also talk when BankUnited (BKU 2.51%), a Florida bank with a $2.3 billion market cap, became a rumored target of many larger banks. No such rumors persist about Regions on either side of an acquisition transaction, which causes me to think it's not currently in the cards. With the persistent problems of the Southeast, the lack of this additional growth opportunity presents problems for the bank.

3. Its a bank
Finally, while I personally think there is a lot of value to be found in the banking sector, the market as a whole still seems to be skeptical of bank stocks like Regions Financial. It seems that every other day there is some news about some big bank losing in court or paying a settlement because of mortgage shenanigans or various other reasons.

Furthermore, there is no industry under more scrutiny than the banking sector because of the financial meltdown they helped cause in 2008. The largest banks are required to pass certain "stress tests" every year, testing the banks' ability to handle various economic scenarios, including a massive drop in home prices, high unemployment, and substantial banking losses. Hopefully, Regions Financial can follow up its stellar performance in the next round of tests early next year, but only time will tell.

Don't take my word for it
While I like to think that I have the power to move markets, I'm no Warren Buffett. It goes without saying that these three reasons should not be the only reasons that you sell -- or avoid -- Regions Financial as an investment. I do hope that they are a good starting point as you dig deeper into your research on the bank. {&sfr%}