We expect Regions Financial Corporation (RF Quick QuoteRF - Free Report) to beat earnings expectations when it reports second-quarter 2016 results on Tuesday, Jul 19, 2016.

Despite a tough backdrop for the U.S. banks since the beginning of the year due to concerns over the Chinese economic slowdown, continued volatility in commodity prices and the prevailing low interest rate environment, Regions’ earnings from continuing operations in first-quarter 2016 managed to beat the Zacks Consensus Estimate. Results benefited from higher net interest income as well as non interest income and lower expenses, partially offset by increased provisions.

Interestingly, Regions delivered positive earnings surprises in two of the trailing four quarters with an average earnings beat of 2.70%. Regarding the stock performance, Regions gained more than 7% over the last three months.

REGIONS FINL CP Price and EPS Surprise

REGIONS FINL CP Price and EPS Surprise | REGIONS FINL CP Quote

Will the upcoming earnings release give a further boost to Regions stock? It majorly depends on whether the firm is able to beat earnings estimates for the third straight quarter.

Why a Likely Positive Surprise?

Our proven model shows that Regions is likely to beat earnings because it has the right combination of two key components.

Positive Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, stands at +5.00%. This is a very meaningful and a leading indicator of a likely positive earnings surprise for the company.

Zacks Rank #3 (Hold): Note that stocks with Zacks Ranks #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings.

The combination of Regions’ Zacks Rank #3 and ESP of +5.00% make us confident of an earnings beat on Jul 19. Also, the Zacks Consensus Estimate of 20 cents for the quarter remained stable over the last 30 days.

Factors to Drive Q2 Result

Fee income to exhibit strength: Non-interest income might get a lift owing to Regions’ initiatives to expand its several capabilities including capital market, treasury management and insurance. In the last quarter’s conference call, management noted that capital markets income which improved significantly in first-quarter 2016 will likely experience some movement from quarter to quarter.  Service charges are likely to exhibit modest growth to reflect the benefit from checking account growth. Further, the quarter should reflect seasonally higher mortgage banking revenue reflecting higher originations on the back of stronger purchase as well as refinance volumes.

Notably, during the first quarter, the company recorded $14 million increase in income related to bank owned life insurance, which was mainly attributable to claims benefits, as well as a gain on exchange of policies. In this regard, management expects the run rate in the $18–$20 million quarterly range.
 
Loan growth to support net interest income; margin pressure lingers:  Underlying loan demand remained stable during the second quarter, as banks witnessed an overall growth in loans including commercial and industrial and commercial real estate loans. Also, demand for several consumer categories including card and residential loans remained strong.  Considering the broader trend of the industry, we expect Regions which expects projects loan growth of 3–5% for the year, to record modest growth in net interest income (NII) in the second quarter

According to management, during the first quarter Regions saw $5–$7 million in NII benefits related to lower premium amortization and higher dividend income related to trading assets. However, the second quarter will not see any such benefits. Also, absence of further rate hike is likely to weigh on its net interest margin in the second quarter.

Cost control measures to ease expense burden:   Expense might trend upward in the upcoming release given the company’s continued investments tied with revenue initiatives. Further, management expects FDIC to increase around $5 million on a quarterly basis when the FDIC assessment surcharge is implemented. However, cost pressure should be offset to some extent as the company remains focused on expense management with its long-term goal to reduce $300 million of core expenses.

Stable credit quality with reduced energy allowances: Management expects that given its credit trends and fluctuating commodity prices, certain credit metrics may experience volatility. Notably during first-quarter 2016, the increase in company’s allowances was related to the energy portfolio. However, given the rebound in oil prices that hit rock bottom in February, the allowances tied with energy portfolio should not be significant.

Stocks that Warrant a Look

Here are some stocks worth considering, as according to our model they have the right combination of elements to post an earnings beat this quarter.

Comerica Incorporated (CMA Quick QuoteCMA - Free Report) , which is expected to report on Jul 19, has an Earnings ESP of +1.47% and a Zacks Rank #3.

Federated Investors, Inc. has an Earnings ESP of +2.13% and carries a Zacks Rank #3. It is scheduled to report results on Jul 28.

Cullen/Frost Bankers, Inc. (CFR Quick QuoteCFR - Free Report) has an Earnings ESP of +1.94% and carries a Zacks Rank #3. The company is expected to release results on Aug 3.

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