Regions Financial Corporation (RF) Earnings Call Transcript & Summary

Good afternoon, everybody. Thanks for joining us again. I'm really excited to have Regions Financial join us for this session. So with us today are Barb Godin, Chief Credit Officer; Ronnie Smith, Head of the Corporate Banking Group; and Deron Smithy, Treasurer, along with other members of the management team that will be around to take your questions during Q&A. And with that, thank you all so much for joining us today.

So Barb, I thought I'd kick it off with you. With the U.S. election now behind us, who knows maybe. But COVID phase is still spiking globally, could you kick it off by discussing your view on how the economic recovery will fare as we look out into 2021? And how important is a second stimulus and perhaps an additional round of PPP to that recovery?

Yes. Let me start off by saying we're really encouraged by the news that we all heard this morning of a vaccine we should have by the end of the month and potentially more than just one vaccine. So that would be great. Having said that, we still think we need a stimulus package that should come. And again, we're hoping sometime in January time frame that we would give a stimulus. But having said that, we're encouraged already by a lot of the signs we're seeing, at least, in the Southeast. And remember, for the Southeast, what we saw is that the Southeast went into lockdown for COVID a lot later than the other parts of the country, and we came out a lot earlier. And you can look at things like our unemployment rate, which is about 200 basis points lower than the rest of the country, et cetera. So things are starting to move along, which is good. We think that we're going to continue to have some rebounds, but we think it's going to be up and down. There's going to be a lot of volatility, which is why we've talked about things peaking generally in the middle of next year, the middle of 2021, as we currently see it. So there's going to be continued stress, but there is some optimism, clearly that's out there. And we think if shutdowns happen that they're going to be more targeted than be general in nature.

Got it. And Ronnie, maybe just to get more specific, what are your 26,000 or so clients telling you about how they feel economic trends are playing out in your 4 Southeast markets? And how has that sentiment evolved over the past several months?

Yes. Erika, it really depends on which part of the industry that you talked to, as you can imagine, with 26,000, you're representing a lot of the different entities. But if I had to sum that up, I would say, cautiously optimistic, they're leaning really heavy into building cash. We continue to see that and pay down debt. Capital markets has been strong. And so many of those who have access to the capital markets are taking advantage of the lower rates and paying down lines. We've seen lower line utilization as we reported at the end of the third quarter. We continue to see clients build cash. On the other side of the balance sheet, we're seeing unprecedented growth of deposits, especially the noninterest-bearing deposits. There was a bit of a wait and see about what would happen with the election. And I guess, that has solidified a bit. There's some sense of maybe a little bit of uncertainty about what will happen. But I think that has moved them back a little closer to the center instead of just being as conservative as they have been in the past. The things that you would imagine that are going strong, are going strong, all material goods that are focused on the construction industry, especially homebuilder, is going very strong right now. Essential goods, transportation that's associated with that. So anything that you think about also from a technology standpoint, if we were to talk to those clients, you would get a really positive view of where they are today. Others, I would put into the category of being more cautious. And then on the other end of that, the volatility industries like oil and gas, restaurant, especially in the casual dining space but not quick-serve. As a matter of fact, we're seeing some of the best quick-serve numbers that we've seen in a while. So that's a bit of a waterfront answer, but maybe gets you a little bit of granularity into who we're talking and what they're saying at the same time.

Thank you for that. So Ronnie, historically management has talked about targeting loan growth in the GDP-plus range. During your most recent earnings call, you did note that commercial line utilization levels have reached a historic low of around 41%. Can you talk to us about your expectation for utilization rates to rebound now that perhaps we have a vaccine that's effective and also the uncertainty of the election is mostly behind us? I guess the other way to ask this question is, what will get corporates to move building liquidity and cutting costs to offense?

Well, I think when you feel like you have adequate liquidity, that will cause the pause. And most of the feedback that we're getting from clients is that they feel good about their liquidity build right now. So we do anticipate that with utilization rates being where they are, we are forecasting and anticipating they will stay in that same area because of our belief and what we hear back from clients is that they will plan to use their liquidity before they tap back into the line. So we do have some of that to burn through. From a capital expenditure standpoint, I think they will want to understand and what -- again, what we're hearing back is that they want to understand what that will look like from an investment standpoint, will there be instruments to do that? And what will the future hold in their -- hold for them in their particular industry. So I think that we will see utilization about where it is, bumping up and down. And we'll see some use of the cash build that has occurred before we see any dramatic movements back to higher line utilizations.

And Ronnie, has Regions benefited from some of the M&A disruption that we've seen in the Southeast so far? I mean, if we could also get a little bit of an update on growth in your expansion markets in Atlanta, Houston and Orlando, please?

Yes. Sure. So we have pulled out those as growth markets, and they do represent great growth markets for us. And anytime that there's disruption in the space that creates opportunity for those of us who compete there, we've been successful hiring really strong leaders in all of those markets. We continued conversations about what those markets mean for us. But I would set aside the disruption piece of that, maybe just for a minute and talk about longer view, obviously, disruption creates opportunity. But when we talk about attracting talent, it's really around taking a long view of who we are as Regions, building relationship banking, not focusing in on transactions and trying to be the long term solution, not only for the clients, but also for the associates that we're talking to as well. So in all 3 of those markets, certainly, we're seeing good positive momentum, but we've got a long view for each of those markets as well.

Great. Another piece of good news. Capital markets has had a strong year. You could outperform your initial revenue expectations of $45 million to $55 million in a quarter. Can you discuss some of the strategic expansion that has occurred in this business? And where you see further opportunities? And what are your expectations for continued momentum in capital markets as we look out into '21?

Yes, capital markets is a really solid story for us. As you know, we've built that out over the past 10 years, and it's been built to focus on our existing client base. And I think that may be the difference that you see. When we are bringing in talent to that group, we're talking about the opportunity to penetrate a very broad, deep client base located throughout a 15-state footprint with the growth markets that you talked about just a bit earlier. This year, capital markets have surprised on the positive simply because we've seen interest rate at all-time lows and the company is large enough to utilize capital markets, have taken advantage of some of the long-term positions that they want to take relative to debt, paying down some of the lines that we talked about a little bit earlier. M&A seems to be picking up a bit as we speak. There is more consolidation in certain industries that are going on. Although we haven't seen the big rebound in M&A, we see green shoots, as I would describe it, for the M&A area. And I also think that do we need to build -- I think your question was, do we need to build additional opportunities or products and services? We feel good about the foundation that we put in place, but we certainly are always looking to do bolt-on type talent pieces that we could bring in and also products, especially around the fixed income side of things. So overall, very pleased with what we see within capital markets and throughout the pandemic, it's been solid performance for us.

Thank you, Ronnie. I wanted to ask you about your RAROC you focused [Technical Difficulty] I think in Investor Day, you pointed out significant improvement of -- it was 11% in 2016, and it went up to 15% in 2018. Where does this settle out as we think about a lower for longer rate backdrop but post pandemic?

Yes. Certainly, rates are going to have an impact on the the RAROC returns, but the way that we think about risk-adjusted returns is through the relation. And so we put in place something that we refer to as our capital commitment working group and that group is really focused on a weekly basis, looking at the opportunities, material, opportunities that we have to do business with companies and ensuring that we're not doing transactions, but that we have pathways to be relevant in those relationships developing, if not traditional banking services, certainly capital markets and other ancillary business through our trust and private wealth areas that help us to leverage that up. Where does RAROC settle out on post-pandemic, I think if I knew where rates would settle out post-pandemic, I could answer that question a bit better. So I'm probably not willing to give a view of where we think that will settle out. What I will tell you is that we continue to see strength in relationships. We continue to see strength of funding. Our deposit balances have grown appreciably throughout the pandemic at a very low cost to us. And so all of that helps fuel back those risk-adjusted returns that we're looking for. Martha, I know that you've been involved from RAROC and CCW perspective for a while. And Erika, I may ask Martha, if she has any additional comments about that topic?

Thank you, Ronnie. So I've been involved with it since we started CCWG. And it's truly become embedded in the organization as we think about how do we become even more meaningful to our clients, how do we optimize that relationship and make sure that we're providing them with the advice and the solutions and the products that they need? And CCWG is that forum that allows us to really have that discussion and talk through and challenge what are we doing, what should we be doing and we -- to Ronnie's point, we've been seeing the benefits over the year. And it's really starting to snowball in terms of it's part of the DNA of all of our associates now.

By the way, CCWG stands for Capital Commitments Working Group, in case we did mention that.

All right. We love our acronyms.

Yes. Ronnie did mention it earlier. So and maybe one more question for you, Ronnie, before I turn the spotlight back on to Barb. Nonbank financing has been a fierce competitor to your business. And so many thought, including myself, that a recession would help clear the decks here. But given the unprecedented amount of Fed support, it doesn't seem like that clearing process is going to happen anytime soon. Any thoughts here in terms of how the nonbanks evolve as competitors? And is there really anything other than rate structurally going higher that would shake them out of a strict amount?

Yes. I think, Erika, that our nonbank competitors are here to stay. I think there's -- they have found lower funding sources as well. There's a lot of liquidity in the market today. And so I have not seen -- with a few exceptions, I've not really seen a shakeout of the competitor set that we see in the nonbank areas. I do think that we've seen a bit of tightening by that group, simply because of some of the weakness that has surfaced throughout the pandemic and maybe some of the positions that were being taken have tightened, but not seeing that disappear. And I think that's another competitor that we will continue to have to face. We talk about our role is playing in that narrow space between the nationals and the smalls. And I would put the smalls along with -- majority of the time with that nonbank competitor set. And so we have to be able to provide products and services that really outrun that particular set of nonbank competitors and then when we compete with the nationals, we have to outservice and outrelationship with our people, with our belief and our philosophy that local bankers supported by industry and product experts will win. I tell our teams all the time where we align the best is where we win the most. And so we've competed effectively. We look forward to continuing to compete against both the nonbank and the bank competitors.

Thanks, Ronnie. And maybe just to piggyback off of some of the conversation regarding the Capital Commitment Working Group. Barb, Regions has gone through a capital optimization transformation, I would say, over the last couple of years, among the many changes in strategy includes runoff of certain loan portfolios, such as auto and GreenSky. Can you remind us of the loan growth strategy from here? Where are you looking to absolutely grow versus runoff? And where do you see the most momentum as we look out in next year?

Yes. I'm going to start. I'm also going to invite Ronnie to comment on that as well. And when we think about all of our portfolios, we're looking at relationships versus individual single transactions. So a lot of our focus is on that. And as you think about GreenSky as an example or auto, those are individual relationships where it's hard to get the rest of that relationship. One of the things we found, Erika, is when you have the full customer relationship, your actual losses for that segment are lower than when you have single transactional relationships. So it's good business. On top of that, you can get in front of your customers, you can get in front of your businesses a whole lot sooner as well. When you get in front of them, you're able to, again, to have those conversations with them in view of that entire relationship and no one else should need to talk about at the same time. So we're -- we've been very focused on that whole piece of it and making sure, again, that those things that we do really well in our C&I and our corporate space that we're continuing to focus on all of those as well. We got a lot of specialties out there and a lot of expertise. So with that, I'm going to ask Ronnie to step in because Ronnie runs that whole segment, and he'll be able to talk a little bit more about that. Ronnie?

Yes. Thank you, Barb. I would just go back, Erika, and from a CCWG perspective, we're focused on what Barb said on the relationship side, but you will see us continue to rationalize capital as we think about where we're going to utilize capital and open our balance sheet up to clients. Again, staying away from the transaction type of relationships and looking forward to those that we're able to build broad and deep in. So -- and we will shape the portfolio as well over time. We've not been as active on the loan sales and trading desk as I think you will see us as we go in the future. And it takes a lot of discipline at this point to do that because loans are flat to down just based on this whole issue around line utilization. And so -- but it takes a lot of discipline to go out to secondary markets and shape the portfolio the way you want to, and we're driving that based on the concentration limits that we talked about a bit earlier, but we're also driving it based on the relationship returns that we're either seeing or not seeing. And so CCWG represents the oversight group that will allow us to really focus in and to pick and choose the industries that will create this diversified portfolio we're looking for.

Thank you for that, Ronnie. And before I turn it over to a discussion on the credit quality outlook, I just want to remind the audience. If you have any questions for the Regions team that we have on, please remember to submit your question through the Veritas Webcast portal. So Barb, during the third quarter call, we discussed expectations for net charge-offs to peak around mid-2021. Can you talk through the trends that inform your expectations for the pace of charge offs? And are you considering the potential for an additional round of stimulus?

Well, as part of our reserving process, I'll let Anil talk to that in a few minutes, but we did not include stimulus in our reserving process. So I'll put that off to the side to begin with. In terms of when we look at our charge offs, we have looked with our customers' balance sheets and said, what do we expect from them, both on the consumer side as well as on the corporate side. And that has helped inform us. The other thing that helps inform us is all of the metrics, the early warning indicators that we have, et cetera, one of them is as simple as criticized loans. What's happening with our criticized loan levels? You can see in the third quarter, our criticized loans were down. We're going to see some volatility in that. It's going to go up and down depending on what's happening up there. But that to me is that early bill weather that says, are things getting a little bit better or are they still -- is there still a lot of stress out there? I don't want to lead you down the path of there is no stress. And if I sound too optimistic, it's not that I'm optimistic at all. It's -- again, looking at every one of those signs. Some of the signs, Erika, that I look at on the consumer side is things like residential mortgages, are customers doing cash out mortgage revise, are people drawing down on their lines of credit and using that instead of cash, et cetera? The answer is no, we haven't seen any of that. In fact, drawdowns and line usage is actually down from pre-COVID levels. Which is surprising. So what it means to me right now is what customers are doing is they've taken the stimulus they've gotten. They've also looked at their balance sheets, which were, by the way, we're in the best shape effort coming into this recession. And they're able to say, what do we need to do to either trim our expense, in particular, it's the trimming of expense or to make sure we have any kind of additional cash coming in. And consumers as well as businesses have done a great job on that front on cash flow management, on liquidity, et cetera. So they haven't had, for example, needed deferrals as much. We can talk about that as well. They haven't needed just many deferrals because of it. So we are seeing that things are getting a little bit better. They will be spotty. And we do believe, however, given all of that, given the stimulus that things will peak likely by mid next year before they start to get better.

So before I ask you where you think that peak will settle out, maybe let's pick up on what you were referring to in terms of the deferrals. How have the trends been here in terms of the initial deferral period ending? And what is -- once that initial deferral period ends, talk about sort of the exit rate to current versus the need for a second deferral?

Yes. We have been really pleasantly surprised with the second deferral rates being as low as they were and have been showing us. We have not seen any tick-up in the second deferral rate levels right now. So second deferrals were running somewhere in that 2% level, which is great. Our customers, the conversations we're having with them, they are able to continue to make payments. We've seen very few that have had to come of deferrals and then actually go into charge-off or nonaccrual or any of the other delinquency buckets. So overall, so far, and it's still early, fingers crossed, but things have worked well on the deferral front, but we are continuing to look at that on a day-to-day, month-to-month basis. It gets a lot of attention.

And as a follow-up for this, I think you guided for the fourth quarter for net charge-offs to fall between 55 to 65 basis points. Interestingly, at your Investor Day almost 2 years ago, I think your expectations were 40 to 65 basis points for 2020 and '21, and again, that's pre-pandemic. How should we think about where net charge-offs peak? We fully get it, there's a lot of consensus from banks around the timing, but part of maybe the valuation disparity before today is that people are looking back historically. So what neighborhood do you think net charge-offs peak out for this cycle, given all the data that you have in front of you?

Still back to the 40 to 65, the original range we gave on Investor Day. We're consistent, if nothing else, and we really believe in our numbers, in our analytics, in our data and the way we service our customers, et cetera. Now what you're going to see having said that, is you're going to see some volatility, just like you did at the beginning. In our second quarter, we had 80 basis points of charge-off and then it went down to 50%, as an example, you're going to see that kind of volatility. But on an annualized basis, the 40 to 65 is still a good range. So you might get a quarter that pops up somewhere sub-1% maybe. But beyond that, I can't see it.