RF: Loan And Deposit Expansion Will Drive Sun Belt Earnings Momentum

Key Takeaways

• Significant presence in the Sun Belt and digital banking investments are driving strong deposit growth and operational efficiency, supporting long-term revenue expansion.
  
• Diversified fee income streams and superior credit risk management strengthen earnings stability and position the company favorably against peers.
  
• Intensifying competition, technological disruption, regional risks, regulatory burdens, and industry headwinds could limit profitability, revenue stability, and long-term shareholder returns for Regions.

Catalysts

A financial holding company, provides various banking and related products and services to individual and corporate customers.

• Sustained population influx and economic growth in the Sun Belt, where Regions has a leading presence and is outpacing peers in deposit and account growth, underpins a long-term outlook for loan and deposit expansion, directly supporting future revenue and earnings growth.
  
• Early investments in digital banking infrastructure and a forthcoming cloud-based core platform are expected to drive customer acquisition, operational efficiency, and cost control, which should improve net margins and drive sustained positive operating leverage.
  
• Robust expansion of wealth management and fee-based businesses-shown by record quarterly fee income and 8%+ CAGR since 2018-diversifies revenue streams, reducing earnings volatility and interest rate sensitivity, thus supporting long-term earnings growth and stability.
  
• Superior credit risk management and ongoing portfolio remix away from riskier credits have produced stable or improving asset quality metrics, positioning Regions to likely outperform peers in credit costs, keeping net charge-offs-and thus earnings drag-lower over the cycle.
  
• Regions' strong, granular base of noninterest-bearing consumer and small business deposits, coupled with effective deposit pricing and growth in treasury management, supports a higher and more resilient net interest margin as interest rates normalize, benefiting both revenue and net interest income growth.

Regions Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Regions Financial's revenue will grow by 8.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 28.7% today to 26.1% in 3 years time.
• Analysts expect earnings to reach $2.2 billion (and earnings per share of $2.57) by about September 2028, up from $2.0 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $2.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.1x on those 2028 earnings, up from 12.3x today. This future PE is greater than the current PE for the US Banks industry at 11.9x.
• Analysts expect the number of shares outstanding to decline by 1.82% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Regions Financial Future Earnings Per Share Growth

Risks

• Heightened competition in key Southeastern markets from both banks and non-bank entrants could compress loan yields and increase deposit costs, challenging Regions' ability to defend market share and pressuring net interest margin and overall revenue growth.
  
• Persistent advancement of digital-first banking and fintech alternatives poses a risk to Regions if its technology modernization lags behind larger or more agile competitors, potentially eroding customer retention, fee income, and cost efficiency, which can negatively impact net margins and long-term earnings growth.
  
• Regions' geographic concentration in the Southeastern U.S. exposes it disproportionately to regional economic downturns, natural disasters, or climate-related events, which could result in elevated credit losses, deteriorating loan performance, and unpredictable earnings volatility.
  
• Regulatory pressures, including stricter capital, liquidity, and climate-related requirements, could drive higher compliance costs and constrain the company's ability to return capital through dividends and share repurchases, reducing flexibility and future earnings.
  
• Structural industry risks-such as prolonged net interest margin compression due to lower rates, aggressive competition for core deposits, and the potential for accelerated industry consolidation favoring the largest players-may decrease profitability, impair revenue stability, and threaten Regions' long-term ability to deliver above-peer shareholder returns.

Valuation

• The analysts have a consensus price target of $28.62 for Regions Financial based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $33.0, and the most bearish reporting a price target of just $26.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.6 billion, earnings will come to $2.2 billion, and it would be trading on a PE ratio of 13.1x, assuming you use a discount rate of 6.8%.
• Given the current share price of $26.82, the analyst price target of $28.62 is 6.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.