Regions Financial: A Sell Even At These Depressed Levels

| About: Regions Financial (RF)

Standard & Poor’s, the ratings agency, recently made revisions to the credit ratings of 31 regional banks. An increase in credit rating would lead to lower costs of funding, while a decrease means costs of funding increases: particularly bad news in this tough banking climate. Regions Financial Corp (NYSE:RF) was one of 20 regional banks that saw no change in its current rating. The criteria for these ratings are based upon industry and economic risks, company specific strengths and weaknesses, and the possibility of a government bailout in another financial crisis, so it's good news that the situation for RF has not been deemed to have changed.

RF shares are currently trading around $4.10. Its last 12-month earnings per share of $0.17 places its shares on a trailing price to earnings ratio of 23.68. This compares with the sector average of 13.57. With earnings expected to be in the region of $0.48 for the year ending December 2012, its forward price to earnings ratio slips to 8.58. However, these expectations may need to be revised downwards after the company announced that it is removing debit card charge in the face of customer revolt. It also said that it would be repaying any such charges levied to date. This is going to be a costly exercise that will negatively impact its full year earnings, and will doubtless require the re-estimation of next year’s earnings.

It had been hoped that debit card fees would undo the damage caused by the Durbin Amendment, which required limits to the fees that banks can charge retailers on debit card transactions. Rochdale Securities analyst, Richard Bove, has calculated that RF’s third quarter revenue was cut by 2.6% - the second largest amount in the sector – by adopting the reuirements of this legislation. Now that it has been forced to remove debit card charges also, it will have to find some other way of making up this shortfall, which is expected to negatively impact annual net income by $0.02 per share.

Talking of RF’s third quarter results, it should be pointed out that revenue and net income surprised on the upside as bad debt provisions were cut and expenses bought more under control. Net income rose from a loss of $0.17 for the same period last year to a profit of $0.08 this year. Profit margin at the bank which serves customers in the south east of the United States is 8.32%.

The company is seeking to increase revenues from other business areas, as evidenced by its recent hiring of commercial and industrial banking execuitves. It must be hoped that the pair is able to drive business forward, and quickly, as the bank is struggling to sell its Morgan Keegan brokerage business. The sale of this unit is key to repaying $3.5 billion in government bailout funds it received in 2008.

Long term shareholders have suffered by remaining invested in RF. The company’s long term share price performance is a classic example of why Buffett’s mantra of “buy, hold, never sell” is not always right. This means that I think Bruce Berkowitz's latest investment was also a bad move. The company’s share price was in the mid $40s back in the late 1990s, but has fallen from grace dramatically since the financial crisis of 2008. Though bouncing back to around $9 in early 2010 from an all time low of around $2.5 set in 2009, the shares now languish at around $4 as the bank struggles to sell assets. Its Morgan Keegan brokerage is seeing advisers depart and take business with them, which will further erode the sale value of those assets.

Profits from charges on bank transactions have been slashed by the Durbin Amendment, and these profits have not been able to be recovered by debit card charges levied on customers. Management is working hard to keep a lid on expenses, and looking to bolster profits from commercial and industrial banking, though with the economy likely to drag over the next few months, this may be hard to achieve. Earnings estimates may be forced to be revised downwards, and the dividend yield of just 1% is not enough to warrant continued support for RF.

I cannot see where further good news could come from, and fear that there are too many outside factors that could gather to cause further strife for the company and its shareholders. Should the company be able to sell Morgan Keegan at a good price - which seems less likely as each day passes - this might alter the dynamics of the company, but until this happens I rate the shares a sell even at current levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.