Strategy to maximize profitability while minimizing risk in investment portfolios

Regions Bank, as well as other banks around the country and around the world, have had to endure to massive but separate concerns in the last few years. The first is that competition with other banks is an omnipresent part of being in the banking industry. This fact is compounded with the other detail that has been more recent in nature but is no less massive. The global financial crisis that was in large part a result of a massive housing market crash in the United States has been stressful to both individual banks and to the larger banking sector in general.

As noted in the introduction to this report, Regions Bank must meet two significant conditions head on. The competition in the banking sector is cutthroat and the global and national financial crises have cause a significant amount of stress on the banking sector and on individual banks and many banks have buckled under the pressure. Regions Bank must craft its strategy and future path in a way that keeps them competitive while at the same time not exposing the bank to undue risk lest the FDIC or other regulatory agencies have to get involved in Region Bank's daily affairs. There is no immediate danger of such an occurrence, but it is something that should always be in the back of Regions Bank executives when making decisions and plotting strategy.

Peer Group Comparison & Forecast

In reviewing the key metrics from the peer review reporting, the comparison of Regions Bank to its competitors is not all that favorable. Return on equity is a barely a fourth of that of the competition although net interest margin is much closer. Net overhead is also close between Regions Bank and the competition but the loan loss provision figure is not good by comparison.

In terms of efficiency, the efficiency ratio, break even yield, break even coverage and the number of loans and deposits per employee are all below the competition but the spread is not all that bad. Balance sheet figures are a huge plus for Regions Bank. Average earning asset ratio is close to the competition and loan/asset ratio is fairly close. Deposits to total assets ratio, tier 1 leverage ratio and core deposits to assets ratio all exceed the competition.

Growth rate data is mostly negative for Regions Bank. Income growth is doing quite well overall but asset, loan and deposit growth are all negative and especially paltry compared to the competition. Return on equity took a big dive with Regions Bank from 2007 to the beginning of 2008 but quickly recovered and has been running even with competition since the beginning of 2009 with the competition just slightly above Regions Bank as of the end of 2011 and projected to stay at roughly the same state of affairs for all of 2012. Average earning asset ratio also took a hit over the same 2007 to 2009 time frame and is running fairly close to the competition both at its current state and through projections but the projections show space being created in the year to come.

Loan to asset ratio is trending down for both Regions and the competition but it remains higher for the competition. Net interest margin measurement actually had Regions Bank at an advantage in 2007 but the tides have since turned with Regions Bank's figure diving below the competition but it has since started to narrow and projections keep that trend intact. Deposits to total assets is a horse race as well but with both the current figures and the projections for 2012 favoring Regions Bank by a decent amount.

Efficiency ratio is dead even at just over fifty percent between Regions Bank and the competition. Asset growth is in the negative for Regions Bank by about four percent but a breakeven point should be realized by the end of 2012. The competition is above five percent but this is projected to come down a bit so the gap between Regions Bank and the competition will narrow if projections are right but the current actual measured trend is that the competition is far out-stripping Regions Bank.

Income growth will be practically nil for both Regions Bank and the competition of recent history and projections are any indication but the losses that Regions Bank endured from 2007 to late 2008 should be a thing of the past, at least for now. Even the competition has endured some losses over that same time frame so they have had to weather a storm as well.

To flesh out forecasts even more, and as requested for this report, there are a few metrics for which projections through 2014 should be discussed. Return on equity is projected to remain basically flat at just above zero for the entire three-year period running from 2011 to 2014. The figure is projected to edge down but will remain above zero at around 1%. ROA is projected to do roughly the same thing when accounting for the S-Corp adjustment. The amount of leverage present is projected to edge upward from the 9.0 range up into the 10's.

In terms of net interest income and loan loss provision (i.e. second level), the changes are nominal. In terms of third level concerns, interest expenses outstrip income by a wide margin. Securities gains and loss stands at a gain, albeit an anemic one. Net interest margin is also growing but rather slowly, at roughly a tenth of a point a year at the current rate. As far as the qualitative aspects of regions bank, all factors in the interest spread are to outperform the market. Loan quality is to remain at roughly the same level. Liquidity is also set to remain as static rather than dynamic. Regions Bank overall capital structure is also set to outperform the market. Non-maturing accounts will continue an upward trend in terms of percent of total liability and equity through at least the end of 2012, reaching close to 70%.

Interest Rate Risk

The 10(k) clearly states that Regions Bank is asset sensitive due to gradual and more immediate shifts in prevailing interest rates. That report also notes that the protracted and historically low interest rates has caused many people to pay down their loans or refinance at lower rates and this has brought pressure against the banks. Until economic conditions improve, interest rates have little to zero change of going up at any sort of significant rate, so Regions Bank definitely has that on its radar as an overall risk that must be dealt with. The interest rates staying low will squeeze Regions Bank's ability to earn income from interest charged to its consumers.

The rate shock analysis bears out that Regions is at some level of risk regardless of whether interest rates go up or down based on the fallout that would result from either scenario playing out. As such, it is safe to say that the overall level or risk to Regions Bank from a shock/interest rate perspective is rather high, although certainly not critical (at least not yet).

As far as a projecting on what interest rates will do and what will happen with Regions Bank as a result, interest rates are not going up until the economic conditions improve and because the United States economy has been stuck in low gear for a couple of years, it is anyone's guess as to when this will come to pass that economic conditions will improve and interest rates will rise. Any inclination present in the GPS projections otherwise is almost certainly false. In terms of volume, yield/rate assumption for interest-yielding assets, and interest cost liabilities, most everything is probably going to remain "as is" for at least some time to come. Many of the GPS charts show flat growth in many key items and insomuch as these are based on flat interest rates being the norm for now, that is almost certainly going to play out exactly as projected. Overall drift as applied to the projections is nominal to none because there is nothing on the horizon to indicate anything will seismically change anytime soon.

For its part, Regions Bank has been jockeying a little bit with credit swaps. They've been switching some fixed investments to variable and vice versa. Variable rates are going to be on the low side right now and this probably won't change for a while, so there shouldn't be a large risk in engaging in such activities and most banks are probably taking the same overall approach.

Improvements

In terms of the improvements it can make, Regions Bank doesn't have a lot of tools in its arsenal, but it has some. A major strength Regions Bank has is that its employees are very efficient and they process a lot of transactions. In times where interest income is limited due to the prevailing economic conditions, attracting a high volume of overall business can be a cure-all for the income per customer being limited.

Another improvement that Regions Bank can engage in is to limit its overall investing and credit risk in any way possible. Making loans to high-risk borrowers, engaging in risk or faulty investments, and otherwise managing money in a sloppy way is a surefire way to get derision from regulatory bodies and/or the public. The figures for the competition bear out that remaining in proper fiscal shape in banking operations is possible even during these uncertain times and there is no reason why Regions Bank cannot do the same.

Over the next twelve quarters, customer service initiatives to drive and retain recurring business are important as this is the best thing Regions Bank can do to get some breathing room. Attracting high-quality borrowers that are willing to borrow money during uncertain times is also important and at a premium nowadays. A barrier to both of these ideas is that people often become paralyzed and are hesitant to make major fiscal decisions in the midst of economic uncertainty. The potential loss of a job and/or concerns about the fiscal safety of one's money is an omnipresent matter to many people. Banking customers of Regions Bank should be reminded that Regions Bank is in sound fiscal shape and even if the worst happens with Regions Bank, the FDIC will insure any deposits made.

An overall increase in business, despite how it is garnered, will boost income (interest income in particular as well as the fees that Regions Bank's customers incur) and these extra funds can be used to start to loosen up credit standards to people excluded prior but that are still rather low risk based on their career and borrowing histories. As long as the right being are being lent to, Region Banks' overall risk profile should remain positive.

Projections bear out that non-performing loans were at an apex from 2009 to the beginning of 2011 but the possibility of significant growth in those bad loans is below 3.6% after being in excess of four percent. A fall of nearly one percent over the last 2-3 years is no small thing and should be taken advantage of. Despite the current economic challenges, much of the economic fallout to bear has already revealed itself and things are starting to settle down, even if economic growth patterns are uneven. The current state of affairs seems to be based more on people being hesitant and tepid rather than a clear and present danger being in play. The failure rate of banks has dropped significantly. All of these factors should be gently pressed upon potential quality loan customers as this would be the main roadblock to procuring their business at this current time.