Release Date: July 19, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Regions Financial Corp (RF, Financial) reported strong second-quarter earnings of $477 million, resulting in earnings per share of $0.52.
- Total revenue remained relatively stable at $1.7 billion on a reported basis and $1.8 billion on an adjusted basis.
- Broad-based improvement in overall asset quality was observed, with non-performing and business services criticized loans as well as net charge-offs improving sequentially.
- Net interest income increased modestly during the quarter, outperforming expectations.
- Wealth management increased 3% to a new quarterly record, reflecting increased sales activity and stronger markets.
Negative Points
- Fee revenue declined modestly compared to the first quarter, driven primarily by lower capital markets and mortgage income.
- Ending deposits declined modestly during the quarter, consistent with seasonal tax-related patterns.
- Adjusted non-interest income declined 3%, driven primarily by lower capital markets and mortgage income.
- Provision expense was essentially equal to net charge-offs at $102 million, and the resulting allowance for credit loss ratio remained relatively stable at 1.78%.
- Operational losses decreased during the quarter, but current activity continues to normalize within expected levels.
Q & A Highlights
Q: Maybe just walk through some of the key drivers of the updated NII guidance. You're expecting some nice growth in the second half. And given that the Fed cuts won't be a material driver, maybe just talk a little bit about the magnitude of the growth that you're expecting. And can you maintain that pace beyond the second half? And what does all this mean for where you think the margin can head over the medium term?
A: Yes. So as we had mentioned last quarter, we are neutral to short term rates. And so the benefit that we see for this quarter and going forward is how we controlled our deposit cost, or interest-bearing costs were up three basis points. So the front-book, back-book benefit that we're getting is when you add securities and loan is about call the 175 basis points, is now overwhelming the change in deposit costs. And we expect that to continue for the rest of the year. So we don't really need any cuts to help that. If we get them, we get them; but we're neutral to that. So we think the driver really going forward, in addition to what I just mentioned will be balance sheet growth. And so we think that can help us continue to grow NII. I mean, when you look at all that, we feel comfortable saying we'd be at the upper end of our range. We also did a repositioning trade, and that'll help us march towards the upper end as well. So we think we're in pretty good shape. We get a little bit loan growth to the back half of the year sets us up nicely for 2025.
Q: Maybe as a follow up on the expenses, the increase in expenses being somewhat commensurate with the increase in revenue. So can you maybe just parse out how much of the increase in expenses was driven by better revenues? And is there may be a pull-forward of some expenses from next year in order to reposition you for improved positive operating leverage?
A: Really, it's the increase attributable to the expected increase in revenue, both NII and NIR that you mentioned. Our expectations for that for the year have been at the upper end of our ranges, the best primary driver. Also impacting the full year, we have about $20 million in expenses associated with market value adjustments on HR assets. And so that is what it is. We'll see if that reverses or not. And to a lesser extent, we experienced some modest incremental increases in the first half of the year, and the opportunities to offset that aren't likely. So it's important when you consider all this revenue and expense that we are firmly committed to generating positive operating leverage so the back half of 2024.
Q: I was hoping maybe you could talk a little, if you could please speak to -- because of the competitive backdrop for commercial lending, I mean, it seems like it's tough everywhere. But it seems like everyone appropriately wants to be in the Southeast, so maybe just the overall competitive landscape. and then maybe if you also please highlight, in your own words, the thoughts what it would take to generate better commercial loan demand at this point?
A: So it is competitive. You're right. We're in great markets. We talk about that a lot. And as a result to that, we're seeing more and more competition. We think we're competing well. We believe our business is largely about the quality of our people. The execution of our plan, providing unique ideas and solutions to customers, those things differentiate us. And fundamentally, in our business, we think is about talent. We continue to recruit across our markets, and they're having some good success. Doing that, as a result, we're seeing nice growth in our commercial middle market business, offset by declines in some of our specialized industries groups and investor real estate as you might imagine that those portfolios paydown. But all in all, activity is still somewhat muted. Customers remain cautious, given some concern about inflation cost, the political environment, just general uncertainty. But activity is improving. Pipelines are stronger than they were a year ago, certainly, stronger than they were two quarters ago. And so we're not projecting much loan growth for this year. We do believe that there is, and we would expect in 2025, I think, to likely see economic activity pickup reflected by the increase in activity in our pipelines. So yes, it is competitive. We think we're competing effectively largely because of the quality of the teams that we continue to build and the long-term relationships that we enjoy, and we'll continue to focus on that.
Q: Question on the deposit side. Just I think the plus 3 basis points on the interest-bearing cost was better a lot lower than people thought. Just wondering if you can talk us through what you're seeing underneath there in terms of where you're continuing to see some back of catch-up and where you're starting to see the ability to change price and how you build that into that forward expectation?
A: Yes. So our [view] at the beta is 43%. We said we'd be in the middle 40%, so call it 43% to 45%. We feel confident in that because we understand our customer base. There still with some remixing going on. But because the industry didn't have a lot of loan growth of demand, the aggressive competition for deposits just has not been there. And we have to be competitive with our deposit rates, and we think we are. We've been very short on things like CDs to take advantage of when we think right rates may actually go the other way. So we have a lot of confidence that may tick up deposit cost, may tick up depending on how the mix shift happens, continuing to grow core checking accounts, and operating account is really important to us. And as a result, I don't think you see a major change in our deposit costs. And therefore, our cumulative beta in that 45% range I think is important.
Q: Following up on Ken's questions on deposits. You're telling us -- and you've always had a good view of (technical difficulty) and you know your consumer (technical difficulty) very well. I'm wondering as we contemplate these rate cuts, how we should expect deposit balances to behave and then what the betas could look like? And David, if you could break it down in terms of how you expect the betas in the commercial versus betas for consumer and also the (technical difficulty) as well.
A: Erika, you broke up a little there, but I think it's what do we think betas will look like as rates come down. So we do have a schedule in our investor deck. It's a good one for everybody to look at. It's on page 18. And so we really have three buckets of deposits, if you will, with different beta assumptions in all three of these buckets. So in general, we expect a mid-30% down rate beta. And so if you think about 35% of those accounts reprice with the market so they're tied to an index or their short-term CDs. So we kept our ten
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
