Regions Financial: 2023 Earnings and 2024 Outlook
2024-01-24
Regions Financial Corporation recently held its earnings call to discuss its quarterly earnings. The call, operated by Christine, featured Dana Nolan, the Executive Vice President and Head of Investor Relations, who played a key role in providing insights.
During the call, Regions Financial reported earnings of $2 billion for the full year 2023. They achieved a pre-tax pre-provision income of $3.2 billion and a return on average tangible common equity of 22%. These impressive results were attributed to several factors, including enhanced credit and interest rate risk management processes, a strong balance sheet, solid capital and liquidity, and prudent credit risk management.
As the company looks ahead to 2024, they plan to continue their success by leveraging their strong balance sheet, proactive hedging strategies, desirable footprint, granular deposit base, and relationship banking approach. However, clients are currently exhibiting cautious behavior and holding off on making long-term investments if they can defer. Sentiment across industries varies, with some expecting growth while others have a more muted outlook.
One of the challenges faced by Regions Financial was a decline in net interest income. This was driven by deposit cost and mix normalization, as well as the start of the active period on $3 billion of incremental hedging. However, asset yields benefited from the maturity and replacement of lower-yielding fixed-rate loans and securities. The outlook for net interest income in 2024 is expected to stabilize over the first half of the year and grow over the back half of the year. The primary driver of net interest income in 2024 will be deposit performance, and the company plans to manage deposit costs lower to protect the margin in a falling rate environment.
Adjusted noninterest income increased 2% during the quarter but declined 5% for the full year. The decline in adjusted noninterest income for the full year was primarily due to reductions in capital markets and mortgage income, as well as the impact of the company's Overdraft Grace feature. The bank expects full year 2024 adjusted noninterest income to be between $2.3 billion and $2.4 billion.
Reported noninterest expense increased 8% compared to the prior quarter, with significant adjusted items including a $119 million FDIC special assessment and $28 million in severance-related costs. However, the adjusted noninterest expense decreased 5% for the full year. The largest expense categories for the company include personnel costs, occupancy and equipment, and professional fees.
In terms of risk management, Regions Financial has been focused on risk rating migration. They have observed migration from criticized classified to nonperforming loans in sectors such as senior housing, transportation and warehousing, office, and manufacturing of consumer discretionary items. The company expects nonperforming loans to be between 80 basis points and 110 basis points and charge-offs to be between 40 basis points and 50 basis points. The trajectory of the allowance and the provisioning or release of reserves can be impacted by factors such as changes in risk rating, portfolio growth, paydowns, and changes in economic conditions.
The company's growth strategy includes seeking businesses that can contribute to their expansion. They aim to maintain a target capital level of 10% and expect a net interest margin of around 3.50% for the full year. To protect the net interest margin, the company utilizes synthetic hedges, such as received fixed swaps and other derivatives. While they anticipate negative operating leverage in 2024, they are hopeful for positive operating leverage in 2025.
During the earnings call, analysts posed various questions about the company's performance and future plans. They inquired about the bank's interest-bearing deposit beta, sentiment across industries, factors contributing to the decline in net interest income, the outlook for loan demand, fee income growth, and the company's expenses and technology investments. The company's executives provided detailed responses to these questions, highlighting their strategies, challenges, and expectations for the future.
Overall, the earnings call covered a wide range of topics related to Regions Financial Corporation's performance, strategies, and outlook. The company's ability to generate consistent earnings, manage risk, and adapt to changing market conditions were key themes discussed during the call.