More on partner potential...Posted by: firerat
In reply to: None Date:8/4/2007 5:42:52 PM
Post #58199 of 58230
These guys aren't exactly bottom feeders either.
Thesis 07-16-2007 by Jaime Peters, CFA, CPA
After buying AmSouth, Regions joined the leagues of the super-regional banks operating in the southeast United States. Never as profitable as its peers, Regions ranks below other opportunities we see out in big bank land.
Even though it was Regions that acquired AmSouth, the former management team of AmSouth is calling the postmerger shots. Besides the head of Morgan Keegan, Regions' investment broker subsidiary, the top brass is almost exclusively from AmSouth. We admire the talents and strategies of CEO Dowd Ritter, who led AmSouth to 18% returns on equity throughout his tenure. As AmSouth was by far the better managed of these two Birmingham-based banks, we think Ritter's leadership gives shareholders the best possible shot at postmerger success.
However, we believe the task of whipping Regions into shape while integrating this large merger might be too much even for a man with Ritter's vision and abilities. Regions has produced a mediocre 12% average return on equity over the past five years, far below its super-regional peers. We expect profitability will be depressed further over the next few years as a result of integration expenses. In order for Regions to have any hope of improving, it must retain the customers and key employees of both firms, a difficult task during an integration of this scope. Regions' competition has been very aggressive about luring commercial bankers and their customers away. While we expect some modest customer and employee attrition, anything more than 5% of the combined firm's deposits and loans would make the bargain price paid for AmSouth start to look expensive.
The most promising part of the merger is the strengthened position Regions will have in Florida. AmSouth's 246 branches has been added to Regions' 153 branches, and the combined entity now has a footprint that covers the entire state. With an average of 1,000 people moving to Florida every day, the demand for deposits and loans is growing faster than elsewhere in the country. Regions' size and breadth of product offerings allows it to compete with top banks like SunTrust and Wachovia. And even with nearly 400 branches in the Sunshine state, Regions is looking to build more.
One highlight from the legacy Regions business is its investment broker business, Morgan Keegan, which made up 50% of the company's non-interest income in 2006. Since Morgan Keegan's results are tied to the capital market, its returns tend to be somewhat volatile. Still, Morgan Keegan adds a complete brokerage product line to Regions' regular bank products, distinguishing it from its community bank competition and putting it on par with national peers. The AmSouth acquisition gives Morgan Keegan access to a new set of customers and gives AmSouth a wider range of products to help tie the customer more firmly to the company.
Valuation
We are maintaining our $40 fair value estimate for Regions. Because of the integration of AmSouth, we expect that 2007 will be a tough year for the bank. We expect that assets will decline by 4% and that loans will decline by 2% as a result of the sale of more than $2 billion of loans that was required to meet regulatory hurdles and customer attrition. However, we expect the company to rebound, increasing assets and loans at an annual 6% and 6.5%, respectively, by 2009. We anticipate similar pain of the deposit side, with total deposits down 5% in 2007 before growing at an average annual rate of 5% beginning in 2008. Regions hits another bump with the unfriendly interest-rate environment, which we believe will compress its net interest margin to 3.31% in 2007 from 3.45% in 2006. We continue to expect Regions to achieve its $400 million in annual cost savings from the AmSouth merger. Expenses will be elevated in 2007 because of integration costs, but should decline to 54% by 2010.
Risk
Regions has just completed a long and difficult integration with Union Planters and is now jumping into another with AmSouth. Regions started the Union Planters integration with some major bumps, losing deposits and customers in Union Planters' home state of Tennessee. Regions has since regained the customers, but if history repeats itself with the AmSouth integration, Regions could be hurt.
See Previous Analyst Reports
Close Competitors TTM Sales $Mil Market Cap $Mil
Regions Financial Corporation 6,088 20,479
* Bank of America 73,439 208,606
* Wachovia 32,419 85,483
* SunTrust Banks 8,142 26,882
* AmSouth Bancorporation 2,495 10,212
* Compass Bancshares 1,858 9,021
* Morningstar Analyst Report Available | Compare These Stocks
Data as of 03-31-07
Strategy
Regions' footprint covers 16 states. The company subdivides its operation into regions, each with its own management. This allows it to tailor the branches to the needs of the local customers better than it could with a centralized model. Regions operates its investment broker as a separate business with access to the bank's customers.
Management & Stewardship
Given its acquisition history, Regions has seen top management turn over fairly rapidly. Chairman Jackson Moore was previously CEO of Regions and before that, CEO of Union Planters. He gave up the Regions CEO position in the AmSouth acquisition. Former AmSouth CEO C. Dowd Ritter became the CEO of Regions. With Ritter at the helm, we expect turnover to stop for a while. Ritter did an excellent job at AmSouth, and we anticipate that Regions will benefit from his guidance. The total board is now a cumbersome 18 people, after three of Regions' directors retired. Additional retirements will help whittle the board down to 15 members over the next few years. We are disappointed that Regions' board opposed a shareholder proposal for annual elections of directors, instead of the current three-year staggered structure, in the 2006 proxy. The top management and board of directors combined own 2.5% of the shares outstanding, with no one person owning more than 1% of the company. Many of the directors have in excess of $5 million invested in the company, including options. This significant stake should keep their skin in the game and help align their interests with those of shareholders.
Profile
Regions Bancorp is based in Birmingham, Ala. The bank, which has $138 billion in assets, operates retail and commercial banking businesses and owns investment brokerage house Morgan Keegan, which made up 18% of the firm's 2006 revenue. With about 2,000 offices, Regions operates in 16 states and is the 11th-largest bank in the U.S.
Growth
Regions' 30% annual asset growth rate over the past five years is mostly a result of acquisitions. The company has acquired more than 100 banks in its history and continued this trend with the recent AmSouth deal.
Profitability
Regions' return on average equity of 12% is below average as a result of its acquisitive history. An average bank of its size would typically have a return near 15%.
Financial Health
Regions has benefited from excellent industrywide credit quality. Net charge-offs are nearly 40% below a normalized level for the company. Regions has maintained its conservative reserve levels during this temporarily low-loss period.
