Regions Financial

Regions Financial reported OK second-quarter results, with net interest income increasing 2.3% sequentially. The bank maintained its full-year net interest income outlook of 2.5% to 4.0% growth.

Why it matters: Regions' average loan growth improved to 2.4% sequentially, a marked improvement from the relatively flat balances of the prior several quarters. Still, the bank expects only low-single-digit growth in full-year average balances, worse than peers that have raised loan guidance this earnings cycle. The bank's loan growth has been affected by its optimization efforts, and based on 2026 guidance, this will likely remain a headwind for the rest of the year. Management noted that some growth in the first quarter was boosted by unusually high draws, which may not recur in the second half. On a more positive note, the bank's interest-bearing deposit costs fell 3 basis points sequentially, better than most regional peers that have seen a few basis points of increase. All else equal, lower loan growth requires less deposit funding growth and reduces pressure on deposit funding costs.

The bottom line: As we incorporate the latest results and updated guidance, we do not anticipate making a material change to our $32.90 fair value estimate for narrow-moat-rated Regions Financial. We assess shares as fairly valued.

Between the lines: The bank expects its full-year adjusted fee income growth to trend toward the low end of the prior guidance range of 3% to 5% growth. While wealth management and deposit service charges performed well in the first half of 2026, first-half capital markets fees have been lackluster, with first- and second-quarter revenue of $83 million and $86 million, respectively, each coming in below the bank's quarterly expectation range of $90 million to $105 million.

Regions' exposure to capital markets business is mostly in middle market merger and acquisition advisory, real estate, debt capital markets, and interest rate derivatives, with no exposure to mega IPO transactions. That said, a pickup in middle market M&A activity from improved client sentiment should still benefit capital markets revenue. In addition, the bank closed a tuck-in acquisition of The Frazer Lanier Company in early July, an investment bank specializing in municipal securities. We expect a quarterly run rate of around $97 million in capital markets fees in the second half of 2026.

We are increasing our fair value estimate per share for Regions Financial to $33.40 from $33.10. The majority of the increase comes from the time value of money, and we also incorporate updated interest rate outlook. Our base-case scenario now includes a 0.25% increase in the federal-funds rate in December 2026 as well as the 0.25% hike in September 2026, and we expect the Federal Reserve to start cutting short-term interest rates in the second half of 2027. Our long-term rate assumptions remain unchanged. We note the bank is not as rate sensitive as some of the other regional banks under our coverage. We now expect the bank to grow its net interest income at a CAGR of 2.7% from 2025-30, up by 0.1% from our last model. Our fair value estimate is equivalent to 2.4 times tangible book value at the end of second-quarter 2026, or 2.1 times when excluding the effects of AOCI. We use an 8.9% cost of equity assumption for Regions Financial.

Consistent with other banks, growth in net interest income is one of Regions Financial’s key valuation drivers. We project 3.1% growth in net interest income for 2026, driven by balance sheet growth and a 4-basis-point expansion in net interest margin to 3.65%. Our 2026 NIM expansion is primarily driven by continued fixed-rate asset repricing and lower funding costs. Considering loan growth, another key driver of NII, we expect roughly 2.9% average loan growth in 2026, an improvement from the contraction in 2024 and 2025, and in line with the guidance range of low single digits. From 2026-35, we expect average loans to grow between 2.9%-4.3%. Longer term, we project that Regions’ net interest margin will normalize around 3.55%, which reflects our expectation of an upward-sloping yield curve and a midcycle federal-funds rate around 2.5%. Taken together, our 10-year NII growth forecast is 2.9%.

On the fee income side, we forecast 3.2% adjusted fee growth (excluding the losses from repositioning its securities) in 2026, close to the low end of the guidance range of 3%-5% growth. We expect some recovery in the capital markets fees in 2026 after a 0.3% decline in 2025. We project normalized fee income growth of around 3.5% in the long run.

Turning to the firm’s expense base, we expect roughly 3% growth in expenses in 2026. We think Regions Financial should achieve a better operating efficiency ratio on a normalized basis, driven by greater scale and its technology investments. As such, we forecast the firm’s efficiency ratio reaching 57.3% by the end of our 10-year forecast, better than its adjusted 10-year average of 59.5% excluding the losses from selling lower-yielding securities.

Finally, considering credit costs, we forecast Regions Financial’s 2026 net charge-off ratio to clock in at 0.48%, lower than the 0.53% seen in 2025, as we think the bank's commercial real estate credit losses peaked in 2025. We expect the firm’s net charge-off ratio to normalize around 0.54% through the cycle. Overall, we expect an average return on tangible common equity of 18.9% in the next 10 years, much higher than our 8.9% cost of equity estimate for the firm.

We assign Regions Financial a Morningstar Economic Moat Rating of narrow, based on durable cost advantages and switching costs that are consistent with our moat framework for banks. Regions Financial has consistently earned returns on tangible common equity in excess of our estimated cost of equity in the past decade, and we forecast the bank to generate returns on tangible common equity in the high teens on a normalized basis.

We believe bank moats are derived primarily from two sources: cost advantages and switching costs. We see cost advantages coming from three primary factors: a low-cost funding base, excellent operating efficiency, and conservative underwriting. Regulatory costs must also be considered.

Regions Financial’s overall funding costs are among the best within our US regional banking coverage, primarily due to its strong deposit franchise. As of the fourth quarter of 2025, its total cost of funding was around 55 basis points (27%) lower than the average of regional banks under our coverage, supported by a higher proportion of noninterest-bearing deposits and lower rates paid on interest-bearing deposits. The bank holds the top deposit market share in its home market, Alabama, with more than 22% of deposits, representing over 20% of Regions Financial's deposit base. Regions also holds the third-largest deposit market share in Tennessee, contributing to over 17% of the bank's deposit base. The Southeast is a highly competitive banking market with strong population growth, but Regions benefits from operating in some rural markets where competition is less intense. Consumer deposits account for more than 60% of total deposits, higher than some regional peers. Management notes that in some markets Regions is the only bank in town, allowing it to gather sticky, granular deposits from local retail customers. The average consumer demand deposit account size was $5,400 in the first quarter of 2026, much smaller than the average checking account balance of $16,891 per WalletHub's analysis of Federal Reserve data. Commercial banking relationships have an average tenure of around 30 years. Regions' sticky and granular deposits should continue to drive its funding cost advantage.

Regions should have a durable advantage in operating costs compared with its peers. Historically, the bank was not one of the more efficiently run regionals, as its rural footprint branches added expense pressure. Regions has been optimizing its brick-and-mortar footprint, reducing its total branches by around 35% from 2009 to 2024. We forecast an operating efficiency ratio of around 57.3% on a normalized basis for Regions, better than its 59.7% 10-year average over the past decade and comfortably in the range of moaty regional competitors. In terms of technology spending, scale also matters. While Regions Financial’s scale is not as large as the superregionals, its annual technology budget of around 10% to 12% of its revenue base should keep the bank competitive. Core system digital investments, started in 2020 with full conversion expected by 2027, should provide further efficiency improvement.

In terms of credit costs, Regions has largely improved its underwriting since the global financial crisis. The bank was hit hard by its ill-fated acquisition of AmSouth in 2006, and its provisioning/net interest income shot up above 100% in 2009, and eventually, some loans were sold for 50 cents on the dollar. The bank has since brought credit quality more in line with regional peers. Investment-grade loans in its commercial lending portfolio rose from 16% in 2010 to 39% by the end of 2025. During the covid-related recession, provisioning to net interest income averaged 10% between 2020 and 2021, in line with peers. We expect Regions' credit costs to arrive in line with regional peers.

Regulatory costs matter both at the industry level and for Regions specifically. The US banking system has improved over the last decade, with capital levels at all-time highs and stronger postcrisis regulation. Despite intense competition, the largest banks by assets have earned higher returns on equity for decades and still do. Our long-run outlook is positive given the US's stable democracy, steady GDP growth, and reserve currency status. Regions is not large enough to be a global systemically important bank, avoiding the most burdensome rules, but as a Category III bank still faces the Federal Reserve's annual stress tests, liquidity coverage rules, and supplementary leverage ratio, giving it one of the best relative regulatory cost positions among regionals we cover. We view the March 2026 Basel III endgame proposal and 2025 stress test changes as mostly positive. The key change for banks between $100 billion and $700 billion in assets is including accumulated other comprehensive income, or AOCI, in common equity Tier 1 capital, which Regions should handle well. The bank already has an adjusted common equity Tier 1 ratio of 9.2% as of the end of June 2026, adjusted for AOCI, comfortably above its regulatory minimum of 7.0%. Further Category III bank regulation requirements will be triggered if Regions surpasses $250 billion in assets, which we currently don’t expect to happen in the next decade, barring any acquisitions.

We do not view Regions Financial’s fee income businesses as particularly moaty on their own, but the bank has built out the breadth of these businesses over time through both tuck-in acquisitions and organic growth, which we view positively. Regions Financial’s overall fee income represented around 32% of its total revenue in 2024, mostly in line with its regional bank peers under our coverage. The bank’s fee income streams include treasury management, wealth management, and capital markets, among others. While Regions Financial’s scale or reputation does not distinguish it, we think these products and services bolster switching costs for its customers.

Regions Financial has one of the best deposit franchises in our coverage, and the bank’s hedging program reduces its net interest margin’s sensitivity to declining short-term interest rates. The bank’s net interest margin could continue to outperform peers in the short term.

The bank’s current investment in its core operating system could drive further efficiency ratio improvements after 2027.

The bank could improve its return profile with more successful cross-selling of its fee income, like treasury management and capital markets business.

The bank has not been growing its loan book as fast as some of its regional bank peers, despite a footprint in the US south with better growth prospects. This could drive proportionately slower balance sheet growth and modest ongoing market share losses if uncorrected.

If the economy went into a recession, Regions would face slower balance sheet growth and higher credit costs.

Regions could struggle to keep up with technology spending of larger peers as scale grows increasingly important in the banking industry.