Regions Financial Corporation (NYSE:RF) Q4 2023 Earnings Call Transcript

Regions Financial Corporation (NYSE:RF) Q4 2023 Earnings Call Transcript January 19, 2024

Regions Financial Corporation beats earnings expectations. Reported EPS is $0.52, expectations were $0.48. RF isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the Regions Financial Corporation’s Quarterly Earnings Call. My name is Christine and I’ll be your operator for today’s call. [Operator Instructions] I will now turn the call over to Dana Nolan to begin.

Dana Nolan: Thank you, Christine. Welcome to Regions fourth quarter 2023 earnings call. John and David will provide high-level commentary regarding our results. Earnings documents, which include our forward-looking statement disclaimers and non-GAAP information, are available in the Investor Relations section of our website. These disclosures cover our presentation materials, prepared comments and Q&A. I will now turn the call over to John.

John Turner: Thank you, Dana, and good morning everyone. We appreciate you joining our call today. This morning, we reported full year 2023 earnings of $2 billion, reflecting record pre-tax pre-provision income of $3.2 billion and one of the best returns on average tangible common equity in our peer group at 22%. Our results speak to and underscore the comprehensive work that’s taken place over the past decade to position the company to generate consistent, sustainable earnings regardless of the economic environment we are experiencing. We have enhanced our credit and interest rate risk management processes and platforms while sharpening our focus on risk-adjusted returns and capital allocation. Although the industry continues to face headwinds from lingering economic and geopolitical uncertainty, as well as the continued evolution of the regulatory framework, we feel confident about our positioning and adaptability heading into 2024.

We will continue to benefit from our strong and diverse balance sheet, solid capital and liquidity and prudent credit risk management. Our proactive hedging strategies continue to position us for success in an array of economic conditions. In our desirable footprint, granular deposit base and relationship banking approach will continue to serve us well. Our strategic plan continues to deliver consistent, sustainable long-term performance as we focus on soundness, profitability and growth. In closing, I am excited to work alongside the 20,000 Regions associates who put customers and their needs at the center of all we do and focus on doing the right things the right way everyday. Now, Dave will provide some highlights regarding the quarter.

David Turner: Thank you, John. Let’s start with the balance sheet. Average and ending loans decreased modestly on a sequential quarter basis, while ending loans grew a little over 1% compared to the prior year. Within the business portfolio, average and ending loans declined 1% quarter-over-quarter. We are remaining judicious reserving capital for business where we can have a full relationship. Loan demand remains soft as clients continue to exhibit cautious behavior. We are seeing clients make long-term investments when they have to, but if they can defer, they are holding off. In general, sentiment varies across industries with some continuing to expect growth, while others have a more muted outlook. Average and ending consumer loans remained relatively stable as growth in mortgage and EnerBank was partially offset by declines in home equity and the GreenSky exit portfolio sale we completed this quarter.

Looking forward, we expect 2024 average loan growth to be in the low single-digits. From a deposit standpoint, deposits increased modestly on an average and ending basis primarily due to increases in interest-bearing business products, which we expect will partially reverse with tax season in the first quarter. Across all three businesses, we continue to experience remixing from non-interest-bearing to interest-bearing deposits. However, the pace of remixing has slowed. Within consumer, we continue to see balanced normalization, but we believe the pace of remixing will continue to slow as short-term market rates appear to have peaked and the relationship of checking balances to spending levels is getting closer to pre-pandemic levels. Our overall views on deposit balances and rates are unchanged.

We expect incremental remixing out of low-cost savings and checking products of between $2 billion and $3 billion and total balances stabilizing by midyear. This results in a non-interest-bearing mix percentage remaining in the low 30% range. So let’s shift to net interest income. Net interest income declined by approximately 4.5% in the quarter driven mostly by deposit cost and mix normalization as well as the start of the active period on $3 billion of incremental hedging. Asset yields benefited from the maturity and replacement of lower yielding fixed rate loans and securities. Notably, during the quarter, we returned to full reinvestment of pay-downs in the securities portfolio and added $500 million over and above that to the portfolio balance taking advantage of attractive market rate and spread levels.

Interest-bearing deposit costs were 2.14% in the quarter, representing a 39% rising rate cycle beta. Growth in higher cost corporate deposits increased our reported deposit betas by approximately 1%, but allowed for the termination of all outstanding FHLB advances. This and a more pronounced slowing in the pace of rate-seeking behavior by retail customers drove modest net interest income outperformance compared to expectations. As we look to 2024, we expect net interest income trends to stabilize over the first half of the year and grow over the back half of the year. $3 billion of additional 4 starting hedges in the first quarter and further late-cycle deposit remixing will be a headwind. However, we expect deposit trends to continue to improve with interest-bearing betas peaking in the mid-40% range.

The benefits of fixed rate asset turnover will persist, overcoming the headwinds and driving net interest income growth in the second half of the year. With respect to outlook, we expect full year 2024 net interest income to be between $4.7 billion and $4.8 billion. Our guidance assumes for 25 basis point rate cuts with long-term rates remaining stable from year-end. However, the path for net interest income is well insulated from changes in market interest rates. The primary driver of net interest income in 2024 will be deposit performance. The lower end of our expected 2024 net interest income range assumes a 25% beta as rates fall, while the higher end assumes a deposit beta similar to what we have experienced during the rising rate environment.

In a falling rate environment, we are prepared to manage deposit costs lower to protect the margin. A relatively small portion of interest-bearing deposit balances is responsible for the majority of the deposit cost increase in the cycle. These market price deposits include index and other high beta corporate deposit types that will reprice immediately with Fed funds. The other primary contributor is CDs with a 7-month average maturity. While these products will lag in a falling rate environment, we are positioned to offset this cost. So, let’s take a look at fee revenue and expense. Adjusted non-interest income increased 2% during the quarter as a sequential decline in capital markets was offset by modest increases in most other categories.

Full year adjusted non-interest income declined 5%, primarily due to reductions in capital markets and mortgage income as well as the impact of the company’s overdraft grace feature implemented late in the second quarter. Partially offsetting these declines were new records in 2023 for both treasury management and wealth management revenue. With respect to outlook, we expect full year 2024 adjusted non-interest income to be between $2.3 billion and $2.4 billion. Let’s move on to non-interest expense. Reported non-interest expense increased 8% compared to the prior quarter, but included two significant adjusted items: $119 million for the FDIC special assessment and $28 million in severance-related costs. Adjusted non-interest expense decreased 5%, driven primarily by lower operational losses.

Full year adjusted non-interest expense increased 9.7% or approximately 6%, excluding elevated operational losses experienced primarily in the second and third quarters. We remain committed to prudently managing expenses to fund investments in our business. We will continue focusing on our largest expense categories, which include salaries and benefits, occupancy, and vendor spend. We expect full year 2024 adjusted non-interest expenses to be approximately $4.1 billion. From an asset quality standpoint, overall credit performance continues to normalize as expected. Reported annualized net charge-offs for the fourth quarter increased 14 basis points. However, excluding the impact of the GreenSky loan sale, adjusted net charge-offs decreased 1 basis point versus the prior quarter to 39 basis points.

Full year adjusted net charge-offs were 37 basis points. Total non-performing loans and business services criticized loans increased during the quarter. Non-performing loans as a percentage of total loans increased to 82 basis points due primarily to downgrades within industries previously identified as higher risk. Keep in mind, between 2013 and 2019, our average NPL ratio was 107 basis points. We expect to see further normalization towards these levels in 2024. Provision expense was $155 million or $23 million in excess of net charge-offs and includes an $8 million net provision expense related to the consumer loan sale. The allowance for credit loss ratio increased 3 basis points to 1.73%. Excluding the loan portfolio sold during the quarter, the allowance for credit loss ratio would have increased 6 basis points.

The increase to our allowance was primarily due to adverse risk migration and continued credit quality normalization as well as higher qualitative adjustments for incremental risk in certain higher risk portfolios. Our average net charge-offs from 2013 to 2019 were 46 basis points. We’ve seen modest acceleration towards these normalized levels in recent quarters. As a result, we expect our full year 2024 net charge-off ratio to be between 40 and 50 basis points. Turning to capital and liquidity. Given the evolution of the regulatory environment, we expect to maintain our common equity Tier 1 ratio around 10% over the near-term. This level will provide sufficient flexibility to meet the proposed changes along the implementation timeline while supporting strategic growth objectives and allow us to continue to increase the dividend commensurate with earnings.

We ended the year with an estimated common equity Tier 1 ratio of 10.2%, while executing $252 million in share repurchases and $223 million in common dividends during the quarter. With that, we’ll move to the Q&A portion of the call.

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Q&A Session

Operator: Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Scott Siefers with Piper Sandler. Please proceed with your question.

Scott Siefers: Good morning, everyone. Thank you for taking the question. Appreciate the comments on the main levers for NII or within NII for your guidance. I was hoping you could discuss a little more about the deposit repricing thoughts that you had. Maybe specifically thoughts about sort of the bifurcation between commercial and consumer deposits? And then just any opportunities you’ve seen with the Fed already having sort of peaked out presumably, any opportunities you’ve had already to maybe take some actions to ease the pressure on costs?

David Turner: Sure. Scott, this is David. One important thing to note is that about 30% of our customer base is really the driver of our interest-bearing deposit beta. If you look at that, little over half of that is related to our commercial book. And those deposits are indexed. So to the extent Fed changes rates, those indexed data changes. So you’re talking about rightfully 55%, almost 60% of that will come down as rates come down. The other represents consumer deposits. So these have been CDs and money market accounts there where we’ve seen migration out of non-interest-bearing accounts. The money market piece, both of these have to be competitive. We have to watch what our competitors are doing to some degree. But we have mechanisms to really start working that down.

Part of that is making sure we don’t go too long on our CD maturities. So we have been fairly short. I think I mentioned in the prepared comments, our average CD term is 7 months. And so we don’t want to extend that much going forward as a matter of fact we’d like to shorten that. It coincides with what we think is going to happen with the Fed. Now we have four cuts baked in to our guidance to hit the midpoint of our guidance, which is on Page 6 of our presentation. And we think that starts probably at the May meeting. And we know that’s different than what the market participants believe, but we think that, that’s going to – I think it’s going to be slower versus faster. It’s important to note, we are neutral to short-term rates.

And so it’s all about managing our deposit costs. And I think we have a good plan to do so. We have given you really a range. It’s a pretty tight range on NII performance on the Page 6 and we kind of talk about betas. So if our betas kind of follow what we had and as rates have gone up, we are 39 a day. We said we’d probably finish in the mid-40s. If we have that coming back down, then we’ll be at the upper end of our range. If we are only at 25% beta as rates come down, knowing things won’t match perfectly then we’d be at the lower end of the range. So our midpoint is a 35% beta, which we think is very doable, in particular, relative to that half of that – a little over half of that is related to index deposits on the commercial side.

Scott Siefers: Perfect. Thanks for that color, David. And then maybe on the lending side, you noted soft client demand, which is very understandable. Just curious how you expect demand to trend as the year unfolds?

John Turner: Yes. Scott, this is John. I would – our current projections are, we believe economic activity picks up towards the second half of the year and we believe we will experience some growth in core middle market banking and small business banking through our Centium platform asset-based lending, which would be typical of this period of time. And on the consumer side, mortgage and EnerBank continue to contribute to growth. Again, any growth we have will be modest, and that will occur likely toward the back half of the year.

Scott Siefers: Perfect. Alright. Thank you very much.

Operator: Our next question comes from the line of Ebrahim Poonawala with Bank of America. Please proceed with your question.

John Turner: Good morning.

Ebrahim Poonawala: Good morning. Just maybe I wanted to follow-up on the fee income guide. Maybe if you can dwell into where do you see growth across fee revenue, particularly what are you assuming in there to capital markets was a weakish fourth quarter. So would that be your outlook on capital market income within fees? And then do you expect to do more purchases for mortgage servicing rights as you did in the quarter? And should that boost mortgage income? Thank you.

David Turner: Yes. So you – it’s David. So your first point on capital markets, we had a pretty tough capital markets finish in the fourth quarter. Been in that is timing. We think some deals, in particular, in the M&A world got pushed into the first quarter. The rate environment has really hampered our real estate corporate banking income line a bit. We think those rebound, both of those rebound, we think M&A has a tendency – a chance to pick up probably towards the back half of the year actually, we’ve seen a little bit of rate relief if you will. So we have a pretty good feel about our capital markets rebound for 2024. Relative to mortgage servicing rights, as you know, we have good capital position. We look to support our business to grow our loan book.

We think loan growth will be muted. So we look to other ways to put the capital to work, mortgage servicing rights has been one of those. We feel good about that asset class because we’re good at it. We have a low-cost servicing group and we’re looking to grow when packages make sense and the economics work to our advantage. There is been a number of those on the market. If we can hit the bid that we have to make sure we get an appropriate risk-adjusted return, we will do that. We suspect there’ll be a couple of opportunities during the year as they usually are. But we have room to grow that without adding a lot of fixed overhead to add people to do the servicing, but we don’t have to add a lot of fixed overhead.