Regions' tangible book value per share fell 8.2% even as net interest income rose

Tangible book value fell while earnings rose

Regions Financial said its tangible common book value per share (a non-GAAP measure), the equity belonging to common shareholders after goodwill and other intangibles are removed, fell to $12.65 in the September quarter from $13.78 the quarter before.

Earnings are not the cause. Net income available to common shareholders was $611M, up from $549M in the second quarter; and, calculated from the release figures, earnings were still left over after dividends and buybacks. Higher rates cut the market value of securities and hedges, and those unrealised marks, grouped as accumulated other comprehensive income or AOCI, flow into equity (our explanation of the mechanism). Asked about capital, John Turner, the chairman and chief executive, pointed to the AOCI impact after last quarter's rate moves, and said "we'll see that AOCI burn down, assuming flat rates", which points to a fall that depends on rates and may reverse if they hold steady.

Reported capital edged up; tangible measures fell

The main regulatory capital ratio, which counts only common equity, edged up from the quarter before. Tangible common equity to tangible assets (non-GAAP) fell to 6.83% from 7.55% in the second quarter. Management said that once AOCI and the proposed Basel III endgame changes to risk weights are counted, the ratio is approximately 10%. Earlier pro forma figures, given in April (AOCI plus a risk-weight cut) and in July (fully phased-in Basel III endgame), may not have been built on the same assumptions as the latest figure, so we do not call the change a like-for-like fall.

Net interest income grew, a little short of the July guide

Net interest income, the gap between what the bank earns on loans and securities and what it pays for funding, was $1,298M, up 1.6% on the quarter before. That was slightly under the growth management guided in July.

On 16 January the company guided net interest income growth for the year of between 2.5% and 4%, and in July said the year was progressing toward the middle of that range. On the call management guided the fourth quarter: growth of 1% to 2%, assuming the Fed raises rates again in December, and a margin of about 3.70%. The full-year range was not mentioned on the call but stays in the earnings slides filed with the results. Asked about the margin path, Anil Chadha said a slide that was focused on the full year had been removed because the fourth-quarter guide was given.

One support for the margin is repricing: new fixed-rate asset yields ran above maturing ones in the third quarter, and management expects a gap at least as wide in the fourth quarter. It also pointed to retail deposit repricing lags after the September rate rise.

Deposits shrank; the beta outlook held at mid- to high 30%

Average deposits shrank from the quarter before. Management pointed to a few large commercial clients moving balances into off-balance-sheet products and to seasonal outflows of public funds; Inve cannot verify the client explanation.

Management described the deposit beta as mid- to high 30% for the rising-rate cycle; the beta is the share of any rise in market rates the bank passes on to depositors. On 17 July, for a Fed rate rise, management expected a similar beta. The company's 7 August investor presentation had already widened that to the mid- to upper-30% range, and the call repeated it. The July call had put the beta for the whole falling-rate cycle at 37%, which sits inside the new range.