Interest fee

Ancillary fee income will hamper Regions Financial (RF) third-quarter earnings

Financial Regions society RF is expected to release its third quarter 2022 results on October 21, before the opening bell. Although the bank’s profits are expected to have fallen from the figure published a year ago, revenues have likely increased.

The Birmingham, AL-based player’s second-quarter 2022 earnings topped Zacks’ consensus estimate for an increase in commission income and net interest income (NII). Average loan and deposit balances also improved. However, higher expenses and the provision for credit losses affected net income. Capital ratios continued to deteriorate during the quarter.

Regions Financial has a decent earnings history. RF results beat estimates in three of the last four quarters, missing the mark in the other, averaging 10.1%.

Financial Corporation Price and EPS Surprise Regions

Regions Financial Corporation price-eps-surprise | Quote from the Regions Financial Corporation

RF’s activity in the reportable quarter was enough to earn analysts’ confidence. As a result, Zacks’ consensus estimate for third-quarter earnings of 59 cents per share has moved slightly north over the past week. The figure indicates a 10.6% drop from the number reported a year ago. The consensus revenue estimate is set at $1.81 billion, suggesting 12.1% growth from the figure published a year ago.

Factors at play

Loans: While lending activity improved sequentially in the third quarter, the pace of loan growth across most categories slowed as the quarter progressed. According to the latest data from the Fed, residential mortgages and consumer loans moderated slightly in the third quarter compared to the second quarter.

Commercial real estate lending, as well as commercial and industrial lending growth, accelerated in the quarter under review. In this context, the company’s commercial loans (comprising commercial and industrial loans, as well as commercial real estate loans), which constitute notable elements of its loan portfolio, should have improved during the quarter under review.

Regions Financial should have benefited from its strong loan portfolio and the past acquisition of EnerBank USA.

TIN: In the third quarter, the Fed raised interest rates by 150 basis points (bps). With that, the level of the key rate reached 3-3.25%, the highest since 2008. Thus, with Regions Financial’s strong asset-sensitive position, $1.2 billion of securities added in the second quarter and a decent loan growth, the bank should have seen improvements in NII and net interest margin (NIM) during the quarter.

Zacks’ consensus estimate for NII suggests a 10.6% increase to $1.22 billion sequentially. Management expects NII in the third quarter to grow 8-10%.

Non-interest income: Geopolitical tensions and uncertainty due to recession fears weighed on equity market performance. Wealth management revenue likely declined because of this.

Weaker stimulus, rising rates and high inflation are expected to have increased transaction and spending volumes, supporting card and ATM fees in the quarter.

The removal of overdraft protection transfer fees and NSF fees likely had a negative impact on revenue from deposit service fees.

Mortgage originations, both purchases and refinances, continued to decline in the third quarter. In addition, in the third quarter, mortgage rates rose, with the 30-year fixed rate mortgage rate crossing the 6% mark in September. Rising mortgage rates weighed on the origination market. As a result, the company likely continued to see lower mortgage bank charges. The ZCE for the same is pinned at $41.84 million, indicating a sequential decline of 11%.

Global transactions fell for the third consecutive quarter. Soaring inflation, the rout in stock markets and fears of a recession have taken a toll on corporate sentiment and plans for expansion through acquisitions. Thus, the volume of transactions and the total value collapsed in the third quarter.

With a decline in global M&A volumes, the company’s capital market revenues have likely been affected. Zacks’ consensus estimate for capital market revenue is pegged at $91 million, indicating an 18.8% decline from the figure reported a quarter ago.

Zacks’ consensus estimate for total non-interest revenue is pegged at $584 million for the quarter under review, indicating a sequential decline of 8.7%.

Expenses: A growing expense base primarily due to higher salaries and benefits, as well as some inflationary pressures, likely continued to hurt bottom line in the quarter ahead. Recent acquisitions and investments in technology have likely driven up costs, hurting earnings growth.

In the third quarter, Regions Financial was asked by the U.S. Consumer Financial Protection Bureau (“CFPB”) to pay $191 million in damages and fines for collecting illegal overdraft fees on customer accounts from 2018 to 2021. The financial impacts of the settlement will be reflected in RF’s third quarter 2022 results and will result in increased expenses.

Asset quality: With the expected increase in loan balances and expectations of an economic slowdown due to geopolitical and inflationary concerns, the company should have built up reserves in the third quarter.

Here is what our quantitative model predicts:

RF doesn’t have the right combination of two key ingredients – a positive payout ESP and Zacks Rank #3 (Hold) or higher – to increase the odds of a beat win this time around.

You can discover the best stocks to buy or sell before they’re flagged with our earnings ESP filter.

ESP Earnings: Regions Financial has an ESP on earnings of -0.40%.

Zacks Rank: Regions Financial currently carries a Zacks rank of 3. You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Bank stocks are worth watching

A few financial stocks, which you may want to consider as they have the right combination of elements to show a pace of earnings in their next releases according to our model, are Associated Bank-Corp SBA and United Bank BKU.

Associated Banc-Corp is expected to release its third quarter 2022 results on October 20. The company, which currently carries a Zacks rank of No. 3, has an ESP profit of +0.57%.

The earnings ESP for BKU is +1.32% and the company currently holds rank 3 of Zacks. BKU is expected to release its third quarter 2022 results on October 20.

Stay on top of upcoming earnings announcements with Zacks Earnings Calendar.

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