Regions Financial: Technical Risks Emerge, But The Valuation And Yield Are Compelling
Summary
- The regional banking industry got rocked by fears of systemic financial risks.
- I see value in Regions Financial considering its low valuation and high yield.
- While the technical chart shows one key resistance level in play, the long-term value narrative outweighs near-term momentum struggles.
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Regional banks have gotten smoked this month. By now, everyone is aware, but following Powell’s rate hike on Wednesday and Treasury Secretary Yellen’s call for no increase in the FDIC insurance limit, the SPDR S&P Regional Banking ETF (KRE) settled just a penny off its 52-week low.
I see value in Regions Financial (NYSE:RF), far removed from Silicon Valley troubles. Despite higher funding costs and tighter lending standards, a single-digit P/E and high yield are too strong to ignore.
KRE: Near Fresh Lows Following the March Rate Hike, No FDIC Insurance Increase
Stockcharts.com
According to Bank of America Global Research, Regions is a large-cap regional bank based in the Southeast with more than $160 billion in assets. Headquartered in Birmingham Alabama, the company has over 1,800 branches and a leading market share in Alabama, Tennessee, and Mississippi. The company's lending portfolio focuses primarily on C&I, residential mortgages, home equity, and commercial mortgage.
The Alabama-based $17.8 billion market cap banks industry company within the Financials sector trades at a low 7.8 trailing 12-month GAAP price-to-earnings ratio and pays a high 4.5% dividend yield, according to The Wall Street Journal.
Back in January, Regions reported a GAAP earnings beat. $0.70 of per-share profits topped analysts’ estimates of $0.66 while revenues were $2 billion, a $50 million beat. Shares rose in the days following the release, but turmoil in the regional banking niche hit the stock hard in March. Net charge-offs fell 17bps Q/Q to 29bps, but that was above guidance of just 20bps.
The management team reiterated its goal to maintain its CET1 ratio at the upper end of the 9.25% to 9.75% range compared to 9.6% at year-end 2022. It will be key to monitor updates to these figures during Regions’ Q1 report next month.
On valuation, analysts at BofA see earnings holding steady in the low to mid-$2s through next year while the Bloomberg consensus forecast is more sanguine on the regional bank’s profit potential. Dividends, meanwhile, are seen as rising steadily over the coming quarters. With both its operating and GAAP P/Es now under 10, the stock appears as a strong value. What’s more, the current yield above 4% is more than 25% higher than its 5-year average.
With a forward price-to-book ratio of 1.04, a 5% discount to its long-term mean, I see shares as a value here. If we apply a P/E near 10, still below the 5-year norm, then the stock should be in the low $20s.
Regions: Earnings, Valuation, Dividend Yield Forecasts
BofA Global Research
RF: Attractive Valuation Metrics, High Yield
BofA Global Research
Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q1 2023 earnings date of Friday, April 21, BMO with a conference call later that morning. You can listen live here. Before that, a shareholder meeting takes place on April 19 which could bring about some volatility, too.
Corporate Event Risk Calendar
Wall Street Horizon
The Technical Take
While the valuation of RF is compelling, the technical picture appears troubled. Notice in the chart below that the shares fell under key support I described back in January. The $17.50 to $19 zone is a key spot for RF, and until it climbs back above it, there’s technical risk. Even with a move through that old support, now resistance, there’s high volume by price as indicated on the left side of the graph.
A chart pattern emerged after my previous article – a bearish ascending triangle (indicated by the orange lines). Shares broke down through an uptrend support line on their way down to under $14 – support from the apex of a consolidation pattern in 2020.
But where do we go from here? I would get long above $20, or you can wager by purchasing the stock closer to the March low of $13.94, then having a stop under $13. Still, Regional features relative strength against the KRE as the stock is well off its low from last week while industry ETF is revisiting its nadir.
RF: Shares Rebound to Key Resistance, Expect A Pause In The Rally
Stockcharts.com
The Bottom Line
I continue to like RF on valuation, but the technicals suggest caution. Overall, I will keep my buy rating based on the long-term valuation thesis, while acknowledging the technical risks.
This article was written by
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