It May Be Time to Buy Region’s Financial (NYSE:RF), But Not Quite Yet

Regions Financial (NYSE:RF) has had a great run over the last six months. The bank’s stock price has increased 66%. And the bank is expected to present investors with solid results when it reports fourth quarter 2020 earnings on January 22, 2021. The projection of analysts is expected to deliver earnings per share (EPS) of 42 cents on revenue of $1.55 billion. For investors who put a priority on such things, the whisper number for RF stock is coming in at 51 cents per share.

If Region’s hits that revenue number they would be posting a 4.7% increase on both a sequential and year-over-year basis.

Times are changing for regional banks

With the move to online and mobile banking, the “little guys” are beginning to get more efficient. In the past, a regional bank relied on adding new branches to grow. Acquisition was a common strategy. But today, many of these banks can pay closer attention to the communities they already serve. This allows them to highlight some of their other strengths such as low fees, potentially lower minimum balance requirements, and perhaps higher yields than the big banks.

One key way this is helping regional banks is in lowering their efficiency ratios. A bank’s efficiency ratio shows the relationship between a bank’s expenses and revenue. A declining efficiency ratio can mean that expenses are decreasing, revenue is increasing or both.

In the third quarter, Region Financial’s 54.1% efficiency ratio (on a reported basis) was its lowest level in more than 12 years. A 2019 McKinsey study showed a strong correlation between a bank’s return on assets and efficiency ratio for banks with over $10 billion of assets.

Most analysts find an efficiency ratio of under 50% to be optimal. This will be one number to watch closely.

But beyond what should be a solid earnings report, Regions Financial looks to have other catalysts.

More Stimulus Is On the Way

In the last few weeks, millions of Americans received their stimulus checks. Extended unemployment claims have been reinstated. Many businesses can avail themselves of funds through the Paycheck Protection Program (PPP). Putting aside the benefit this money represents on a humanitarian level, stimulus is good for the banking sector. The simple fact is, while for many Americans, the stimulus will be used to pay for necessities it is – in some cases – extra money that Americans can apply towards savings as was evident in the spring.

And more stimulus appears to be on the way. This is good news for the banks as they should see their deposits rise.

Vaccines Continue to Rollout

Of course, stimulus will only get the economy so far. What the economy needs is for a safe, successful rollout of Covid-19 vaccines. The sooner this happens, the better. But as long as the vaccine continues to be distributed, and individuals are inoculated without incident, the economy moves one step closer to fully reopening.

On the Other Hand

Regions Financial is looking a little overvalued at the moment. The bank’s price-to-earnings (P/E) ratio sits at 22.56 (as of this writing). Regional banks tend to have a significantly higher average P/E ratio than the “big banks.”

Regions number puts it below the overall P/E average for the entire market, but slightly higher than other regional banks. And the company’s relative strength indicator (RSI) is sitting at around 66 which puts it close to what is considered overbought territory.

Look For An Opportunity to Buy On a Dip

RF stock is down over 2% in midday trading prior to its earnings report. Considering that Region’s paid out a dividend earlier in January, there may be some investors that have fled the stock to look for other growth opportunities.

However for the reasons mentioned above (solid financials, more stimulus, more individuals getting vaccinated), value investors should keep RF stock on their watch list. If the stock price falls, it will be an opportunity to pick up the shares at a lower price before other investors rush in to claim the next quarterly dividend.